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Disappointing Data Chill Wall Street

By BusinessWeek staff

Investors' optimism about the pace of a U.S. economic recovery appeared to dim somewhat on Aug. 14, as reports on industrial production and consumer sentiment contained downside surprises. A report on consumer prices showed inflation remaining tame in July, though that was cold comfort to the stock market: All three major U.S. equity indexes sustained losses of over 1% in late-morning trading on Aug. 14.

BusinessWeek compiled comments on these economic reports and other key topics from Wall Street economists and strategists on Aug. 14:

David Wyss, Standard & Poor's (MHP) The University of Michigan reported that its preliminary August survey of consumer sentiment fell to 63.2 from 66.0 in July. The drop was a surprise; the consensus was for a rise to 68.0. Most of the decline was in the present conditions index, which fell to 64.9 from 70.5, probably in delayed response to the spike in gasoline prices. Expectations were down less, to 62.1 from 63.2.

Along with this week's weak retail sales report, the new data cast doubt on any third-quarter recovery in consumer spending.

Ted Wieseman, Morgan Stanley (MS) The 0.5% gain in industrial production in July wasn't quite as strong as expected but still marked the first increase outside of strike and hurricane volatility since 2007. Manufacturing output surged 1.0% on a spike in motor vehicle assemblies that should be extended into coming months. Spillover from the auto rebound helped drive the first gain in factory output excluding automobiles since early 2008.

The unusually cool weather in July caused a sharp drop in utility output (-2.4%) that partially offset the manufacturing rebound, but this should be reversed in August.

Michael Englund, Action Economics The U.S. consumer price index report revealed a flat July headline figure but a 0.1% core price increase, as July food and energy price declines held down the headline. The price restraint this July vs. last year's July surge allowed a big drop in the headline year-over-year figure to a likely cyclical trough of -2.1% in July, from a -1.4% June figure, alongside a drop in the core year-over-year rate to 1.5% in July, from 1.7% in June. The July headline year-over-year drop matched the -2.1% figure last seen in 1950, though we have yet to challenge the -2.9% record-low from 1949.

We expect a similar pattern for the July producer price index report, where we expect a 0.6% headline drop alongside a 0.1% core price increase that will leave respective year-over-year figures of -6.4% and 2.8%.

Alec Phillips, Goldman Sachs (GS) The Fed's [Aug. 12] announcement that it would wind down its Treasury purchase program after a transition period raises questions regarding the other major programs put in place over the last nine months: the Term Asset Backed Securities Loan Facility (TALF); the MBS purchase program; and the FDIC's Temporary Liquidity Guarantee Program (TGLP). None of the three is likely to be expanded in terms of the dollar size of the program, and the FDIC's debt guarantee program, which was a critical component of the policy response last fall, is the most likely to expire on its current schedule. In contrast, TALF and MBS transactions will most likely extend beyond the current end-of-2009 horizons.

In the case of TALF, this is due to the benefit it has had on the pricing of consumer credit, the program's relatively small balance sheet footprint, and its potential to benefit the commercial real estate sector, which has become an increasing concern for bank supervisors. In the case of MBS purchases, the period of purchases is likely to be extended past yearend due to the significant share of total demand the Fed now represents, which cannot be withdrawn all at once. In fact, the pace of MBS purchases has already slowed somewhat, implying that the Fed may already be on track to extend the date of its operations in this area past the end of the year while staying within the $1.25 trillion it has allocated for this program.

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