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|  | DECEMBER 10, 2004
By James Mehring Vital Signs for the Week of Dec. 13 On tap: November industrial production and retail sales data, new CPI figures, updated current-account and trade deficits, and more The Federal Reserve's Open Market Committee meets on Dec. 14. The unanimous opinion of Fed watchers is that the central bank will raise its fed funds rate by another 25 basis points, putting it at 2.25%. While the December meeting is the last of the year, most economists don't expect the Fed will stop raising rates when the calendar hits 2005. Indeed, there are few reasons to think otherwise. By and large, the data show the economy is holding up quite well. The November employment gain of 112,000 undershot forecasts, but the data is coming off the huge increase of 303,000 in October. The average gain for the two months is still over 200,000. The general trend of the labor market is steady, if unspectacular, job growth. The gains will help lift overall personal income and continue to fuel consumer spending. Businesses continue to spend money on capital equipment as well. According to economists surveyed by Action Economics LLC, industrial production is forecast to have expanded by another 0.3% in November. Capacity utilization is also creeping higher and is expected to have reached 77.8% in November. Regional factory activity reports by regional Federal Reserve are showing a slowdown in current activity, but the outlook for the coming six months, with the exception of the New York Fed report, are quite positive. Some economists believe the expiration of the bonus-depreciation provision at the end of the year will mean a slowdown early next year in new orders for factory goods and industrial production. However, pent-up demand resulting from a pullback in capital investment earlier this decade, the continued desire among businesses to improve productivity, and Corporate America's improved financial health all suggest that any easing in capital spending should be temporary. The Fed believes inflation will remain benign. However, most risks to this view would appear to be on the upside. True, crude oil prices have come down, but natural gas prices have also been quite volatile lately. The spot price, which topped $8 per thousand Btu in late October, is currently near $6, despite moderate temperatures across most of the country. Cold snaps in recent winters have led to sharp increases in prices. Longer-term inflation issues include the falling dollar, which appears to be lifting import prices, an anticipated slowdown in productivity growth and higher unit labor costs. Most economists don't see inflation getting out of hand either, but that's due in part to expectations of continued rate hikes by the Fed. According to Action Economics, the consensus among economists is for the Fed to keep on its quarter-point-per-meeting trend through at least the first quarter of next year. By the end of March, the Fed Funds rate is forecast to stand at 2.75%. Here's the weekly economic calendar. MEETING OF NOTE Monday, Dec. 13, 12 p.m. EST Bond Market Association releases its annual year-end U.S. economic forecast in Washington, D.C. RETAIL SALES Monday, Dec. 13, 8:30 a.m. EST The Commerce Dept.'s figures on retail sales are expected to show a small decline for November. The consensus estimate among economists surveyed by Action Economics is a 0.1% dip last month. Prior to the 0.2% gain in October, sales surged 1.6% in September and fell 0.3% in August. A slowdown in auto sales will weigh on overall sales. Light-vehicle sales came in at an annual pace of 16.4 million in November, after 17 million vehicles in October and 17.5 million in September. Excluding autos, the median forecast is for a 0.3% gain in November sales. In October, ex-auto retail sales were up 0.9%, after a 0.8% gain in September. BUSINESS INVENTORIES Monday, Dec. 13, 10 a.m. EST Economists queried by Action Economics are projecting a 0.5% rise in inventories held by manufacturers, wholesalers, and retailers for October. Inventories expanded by 0.1% in September, after a gain of 0.7% in August, and 1% in July. The Commerce Dept. already released October factory-inventory numbers. Manufacturers reported their inventories rose by 0.5%, on top of a 0.1% rise in September. MEETING OF NOTE Tuesday, Dec. 14 The Federal Reserve's Federal Open Market Committee meets to discuss monetary policy. An announcement by the Fed will come around 2:15 p.m. EST. Economists expect the FOMC to raise the federal funds rate once again. Those surveyed by Action Economics unanimously forecast a 25 basis point increase, to 2.25%. ICSC-UBS STORE SALES Tuesday, Dec. 14, 7:45 a.m. EST This weekly tracking of retail sales, assembled by the International Council of Shopping Centers and UBS, will update buying activity for the week ending Dec. 11. In the week ended Dec. 4, seasonally adjusted sales fell 1.7%, following a 1.5% drop over the prior week, a 0.8% gain in the period ended Nov. 20, and a 0.4% dip in the week ended Nov. 13. INTERNATIONAL TRADE Tuesday, Dec. 14, 8:30 a.m. EST The monthly trade deficit probably widened in October. The U.S. trade deficit for goods and services is forecast to have climbed to $53 billion, according to Action Economics LLC. In September, the deficit came in at $51.6 billion, down from the September tally of $53.6 billion. One reason to believe the October trade deficit will be larger is the price of oil. The Commerce Dept. report measures the value, not volume, of a good or service. In October, oil prices hit a record high, topping $55 per barrel. INSTINET REDBOOK RESEARCH STORE SALES Tuesday, Dec. 14, 8:55 a.m. EST This weekly measure of retail activity will report on sales for the second fiscal week of December, ending Dec. 11. For the week ended Dec. 4, sales were off by 0.8%. For the full month of November, sales were down 0.5%. INDUSTRIAL PRODUCTION Tuesday, Dec. 14, 9:15 a.m. EST U.S. industrial production probably expanded by a modest level. The median forecast among economists surveyed by Action Economics LLC is a 0.3% gain in November industrial output. In October, production climbed 0.7%. There was a soft patch during September and August, with output rising 0.1% and slipping 0.1%, respectively. The average operating rate for all industries most likely increased to 77.8%, from 77.7% in October, and 77.3% in both August and September. The October jump in factory output was likely enhanced by the September hurricanes. However, in its October report the Federal Reserve stated, "the exact magnitude of the contribution is difficult to measure." The November report will provide a better indication of just how solid the factory sector is performing. RICHMOND FED SURVEY Tuesday, Dec. 14, 10 a.m. EST The Richmond Federal Reserve Bank will release its November survey of business conditions in the Richmond Fed district. The October survey showed that manufacturers weren't doing as well, but had a brighter outlook for the coming six months. The headline index fell to 14 in October, from 22 in September, and 18 in August. The new orders, capacity utilization, and employment-related indexes also declined in October. The index tracking unfilled orders came in at -5, from -6 in September, and 1 in August. With regard to the next six months, the main index jumped to 35, from 23 in September and 28 in August. In addition, there were nice bounces in the new orders, unfilled orders, and capacity utilization indexes. Respondents didn't show any increased desire to expand payrolls. However, in order to meet the anticipated increase in demand, the average workweek is expected to lengthen. The results also imply manufacturers want to meet anticipated demand through greater productivity. MEETING OF NOTE Wednesday, Dec. 15 and Thursday, Dec. 16 U.S. President George W. Bush holds an economic conference with administration officials. Among the topics that will be covered include the health of the U.S. economy, tax reform, Social Security, and the budget deficit. EARNINGS REPORTS Wednesday, Dec. 15 Bed Bath & Beyond, Best Buy, Biomet, and more. MORTGAGE APPLICATIONS Wednesday, Dec. 15, 7 a.m. EST The Mortgage Bankers Association releases its tally of mortgage applications for both home buying and refinancing for the week ending Dec. 10. In the week ended Dec. 3 the purchase index bounced up to 490.9, after slipping to 460.3 in the period ended Nov. 26, from 463.3 in the prior period. The latest reading of the four-week moving average was 473.7. Over the week ended Nov. 26, the four-week average was 471.7. The average rate on a conventional 30-year mortgage, according to HSH Associates, climbed to 5.9%, from 5.83% during the period ended Nov. 26. The refi index stayed below 2000, slipping to 1890.6 over the week ended Dec. 3, from 1912.3 over the week ended Nov. 26. In the prior period the index slowed to 2179.3, from 2375.4 in the week ended Nov. 12. The dip pushed the refi index four-week moving average down to 2089.4, from 2153.9 over the period ended Nov. 26. EMPIRE STATE MANUFACTURING SURVEY Wednesday, Dec. 15, 8:30 a.m. EST The New York Federal Reserve Bank will release its December survey of business conditions for manufacturers in the New York Fed district. According to the median forecast of economists surveyed by Action Economics, the headline manufacturing activity index probably held steady at 20.2. The November survey inched up to 19.8, from 17.4 in October, but remained below the 27.3 reading posted for September. Overall, the rest of the November data showed a deceleration in activity. The new orders index fell to 18.5, from 21.2 in October. The unfilled orders and employment and inventories indexes were also lower for November. The shipments index was up slightly, rising to 21.8, from 19.1 in October. Expectations for the coming six months remained positive, but tempered. The November general business conditions index came in at 53.1, from 61.3 in the prior month. The new orders, shipments, unfilled orders, and employment indexes all dipped in November. HOME BUILDERS SURVEY Wednesday, Dec. 15, 1 p.m. EST The National Association of Home Builders and Wells Fargo (WFC ) will release their monthly survey results for December. The report updates housing market conditions by measuring builders' assessments of current sales, buyer traffic through model homes, and expected demand. In November, the activity index stayed at 71, after rising to that level in October from a reading of 67 in September. The index tracking single-family home sales shot up to 79 in November, the highest level since January 2000. In October, the index stood at 77, up from 73 in September. Expectations for sales in the coming six months eased slightly to 80, from 82 in October. However, current levels are quite strong considering the lifetime average of 64. The index for prospective buyer traffic edged down to 50, from 52 in October, but is easily above the lifetime average reading of 44. EARNINGS REPORTS Thursday, Dec. 16 Adobe Systems (ADBE ), Apollo Group (APOL ), Carnival (CCL ), Cintas (CTAS ), Darden Restaurants (DRI ), FedEx (FDX ), Goldman Sachs (GS ), KB Home (KBH ), Oracle (ORCL ), Tektronix (TEK ), Texas Industries (TXI ), Worthington Industries (WOR ), and more. JOBLESS CLAIMS Thursday, Dec. 16, 8:30 a.m. EST First-time claims for jobless benefits for the week ended Dec. 11 most likely fell back to 343,000, say economists polled by Action Economics. Jobless claims hit a 10-week high of 357,000 over the period ended Dec. 4, after moving up to 349,000 in the prior week, from 324,000 in the week ended Nov. 20. The four-week moving average also climbed higher, hitting 341,300 in the latest week, from 336,500 in the week ended Nov. 27. During the week of Nov. 27, continuing jobless claims hit 2.8 million, from 2.71 million in the week ended Nov. 20. CURRENT ACCOUNT Thursday, Dec. 16, 8:30 a.m. EST The current account deficit -- a kind of cash-flow statement of U.S. international business, including trade in goods and services, net investment income, and foreign transfers -- probably widened to $170.9 billion over the third quarter, according to Action Economics. During the second period, the current account widened to $166.2 billion, from $147.2 billion in the first quarter of the year The U.S. trade deficit in goods and services totaled $155.7 billion in the third quarter, wider than the $150.3 billion tallied for the prior quarter. The consensus forecast of a $170.9 billion deficit would stand at 5.8% of the gross domestic product. After floating between 1% to 2% of GDP through the mid-nineties, the current account gap started its upward march in 1998. There are scant signs of any shift in the present trend. Purchases of stocks and government bonds by foreign investors, governments, and central banks have helped to finance the country's current account shortfall. However, financial markets are nervous foreign investors will become less eager to park their money in the U.S. as the gap grows. Chief among the concerns is that Asian countries, such as Japan and South Korea, are relaxing their currency pegs. In order to maintain a loose currency peg, the countries have been purchasing dollars or U.S. Treasury bonds. Purchasing U.S. assets with yen or won, for example, helps curb the appreciation of that country's currency to the dollar. Now, however, there are signs that some Asian nations will tolerate a higher exchange rate. Other countries, such as Russia, say they could reduce the share of foreign-exchange reserves they currently hold in U.S. dollars. These events are putting downward pressure on the U.S. dollar. NEW RESIDENTIAL CONSTRUCTION Thursday, Dec. 16, 8:30 a.m. EST Homebuilders are still putting up houses at a rapid pace. Housing starts probably slowed to an annual pace of 1.98 million in November, according to economists surveyed by Action Economics. However, the October pace of 2.03 million is the fourth highest level since 1980. Through the first ten months of the year, new home starts are set for the strongest year since the 1978 level of 2 million. New housing starts will be a key factor for the housing market next year. Higher interest rates and surging home prices in some markets have the potential to cool down demand. If homebuilders overlook any downshift in homebuying, excess inventory in the form of new homes could build up, putting some downward pressure on home prices. PHILADELPHIA FED SURVEY Thursday, Dec. 16, 12 p.m. EST The Philadelphia Federal Reserve Bank will release its December survey of business conditions for the mid-Atlantic region. Economists polled by Action Economics expect the index of general business conditions will come in at 20.5. The November index fell to 20.7, from the October reading of 28.5. Factories in the Philly Fed's area are indicating that production has caught up with demand. The new orders index eased to 22.1, from 24.6 in October, and 26.6 in September. Meanwhile the unfilled-orders index remained in negative territory. The November index stood at -1.2, after tumbling to -5.4 in the prior period, the first negative reading since May 2003. Unlike the New York Fed's latest factory activity report, respondents to the Philly Fed survey were more optimistic about future prospects. Lately, the current and future business activity indexes have moved in opposite directions. The general activity index for the coming six months shot up to 52.1, from 27.6 in October, and 44.9 in September. Both new orders and the level of unfilled orders are expected to increase at a faster clip over the coming six months. CONSUMER PRICE INDEX Friday, Dec. 17, 8:30 a.m. EST An Action Economics survey of economists estimates consumer prices for all goods and services edged up 0.2% in November. The benign monthly gain will be due in part to the decline in oil prices. In November, the spot price of oil fell 4.6%, while the national average price of gasoline easing over 4% to $1.95 per gallon. In October, consumer prices jumped 0.6%, after a 0.2% rise in September and a 0.1% gain in the previous month. The expected November increase would push the yearly rate of inflation up to 3.5%, from 3.2% in October and 2.5% in September. Even excluding the volatile energy and food categories, consumer prices most likely grew by 0.2%. In October, monthly core inflation rose 0.2%, after a 0.3% gain in September. The yearly rate of core inflation would pick up to 2.2% in November, based on the expected monthly gain. In October, the yearly rate held at 2%. REAL EARNINGS Friday, Dec. 17, 8:30 a.m. EST Inflation-adjusted weekly earnings of production workers probably edged down 0.3% during November. The Labor Dept.'s employment report showed a 0.2% decline in average weekly earnings during November, and economists expect a 0.2% increase in the consumer price index over the same period. In October, inflation-adjusted earnings were down by 0.4%, after a 0.3% increase in September and no change in August. Compared to the same period a year ago, real earnings in October were off by 0.4%, after a 0.6% yearly gain in the prior month.  Mehring is an economist for BusinessWeek in New York
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