Vital Signs for the Week of Mar. 8


The weak February employment report caused the U.S. dollar to fall on Friday. After strengthening against major currencies such as the euro and yen over the past couple of weeks, the greenback may give back more of those recent gains. That's because this week's economic data focus on America's "twin deficits": the current account and the federal deficit.

The current account, a measure of trade and financial transactions with the rest of the world, probably posted a deficit of $136.5 billion in the fourth quarter. That would put the total current-account gap for 2003 at $550 billion, or 5% of U.S. gross domestic product. The increase was most likely led by a widening in foreign trade. Over the fourth quarter, the trade deficit totaled $122.4 billion, compared with $121.3 billion in the third quarter.

Going forward, the large decline in the U.S. dollar should help boost exports. Over the past year, the dollar has fallen 13% against a trade-weighted basket of major foreign currencies. This makes U.S. goods and services more attractive abroad because they're cheaper when prices are converted into euros or Canadian dollars.

WIDENING GAP. It also provides an opportunity for American companies to lift the prices of their exports in dollar terms with little risk of losing market share to foreign competitors. Indeed, recent import/export price index data has shown some evidence of the latter occurring.

The federal budget is also expected to post a pretty big shortfall in February. According to the median forecast of economists surveyed by Informa Global Markets, the monthly shortfall probably hit $92.3 billion. The Office of Management & Budget is forecasting a fiscal year deficit of $521 billion. Through the first four months of fiscal year 2004, which ends in September, the deficit stands at $130 billion.

Despite a weaker dollar providing more favorable conditions for foreign trade, the rise in exports is unlikely to make too much of a dent in the February trade balance or in upcoming reports. Higher U.S demand is increasingly fulfilled by imports. In 2003, exports were two-thirds the size of imports. And Asia, where several countries have pegged their currencies to the dollar, is becoming a bigger source for imports.

CORRECTION COMING? A reminder of the widening current account gap and the growing federal deficit could prompt investors to push down the dollar. But that isn't necessarily a bad thing. Indeed, as Federal Reserve Chairman Alan Greenspan noted in a Mar. 2 speech, a declining dollar is needed to rein in the current account deficit.

While the latest data aren't expected to show much evidence of these corrective actions, the fundamentals are in place. According to Greenspan, foreign countries attempting to peg their currencies to the greenback won't prevent the dollar from declining, it will only delay this corrective process.

Here's this week's economic calendar:

MEETING OF NOTE

Monday, Mar. 9

Texas, Florida, and Louisiana hold Democratic Party primaries.

ICSC-UBS STORE SALES

Tuesday, Mar. 9, 7:45 a.m. EST

This weekly tracking of retail sales, assembled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ending Mar. 6. In the week ended Feb. 28, seasonally adjusted sales were unchanged, following a 0.2% decline for the week ended Feb. 21, and gains of 1.4% and 1.8% during the prior two weeks.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, Mar. 9, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the first fiscal week of March, ended Mar. 6. Over the full fiscal month of February, store sales were up 1.2% vs. January sales. For the entire month of January, sales were up by 0.3% compared with December.

RICHMOND FED SURVEY

Tuesday, Mar. 9, 10 a.m. EST

The Richmond Federal Reserve Bank will release its February survey of business conditions in the Richmond Fed district. The manufacturing activity index rebounded to 18 in January, from 8 in December, and 11 in November. The headline shipments index was complemented by a strengthening in the new orders and unfilled orders indexes.

Factory employment in the region remains weak. The numbers of factory workers most likely fell, with the employment index dropping to -8, from 0 in January. However, the average workweek held steady and the wages index improved to 14, from 9 in December.

The outlook for the next six months remained strong. The expectations index came in at 43, from 44 in December. Respondents also believed new orders would increase and the level of unfilled orders should remain high. That points to rising factory output.

MEETING OF NOTE

Tuesday, Mar. 10, 8:00 a.m. EST

Brazilian Central Bank President Henrique Meirelles speaks at a Brazilian-American Chamber of Commerce Conference in New York City.

MORTGAGE APPLICATIONS

Wednesday, Mar. 10, 7 a.m. EST

The Mortgage Bankers Assn. releases its tally of mortgage applications for both home buying and refinancing for the week ended Mar. 5. During the period ended Feb. 27, the purchase index eased to 422.6, after rising to 423.5 for the week ended Feb. 20. The latest reading of the four-week moving average through Feb. 27 fell to 415.6, from 420.9 during the prior week. The average rate on a conventional 30-year mortgage, according to HSH Assoc., inched up to 5.72% in the week ended Feb. 27, from 5.71% over the previous period.

The refi index kept rising. For the week ended Feb. 27, the refi index hit 3532.2, from 3361.9 over the week ended Feb. 20, and 3298.3 during the week ended Feb. 13. The refi index four-week moving average, however, declined to 3252.5, from 3236.2 for the week ended Feb. 20.

The latest mortgage activity data back the belief that poor January housing data was mostly related to winter weather. With housing applications still holding up and interest rates still very low, the housing sector should have a solid spring.

INTERNATIONAL TRADE

Wednesday, Mar. 10, 8:30 a.m. EST

The U.S. trade deficit for goods and services during November probably declined to $42.2 billion, according to Informa Global Markets. The trade gap for December came in at a surprisingly high $42.5 billion, after a $38.4 billion deficit in November. For all of 2003, the U.S. ended up with a $489.4 billion trade deficit, after hitting $418 billion in 2002, from $357.8 billion in 2001.

A large source of the wider trade gap in 2003 came from petroleum products. Imports of crude oil, natural gas, petroleum products, and similar commodities increased by $39.5 billion, to $154 billion. The rebound in the U.S. economy most likely pushed up demand for energy products across the board.

However, trade data is measured in value and not volume. Higher commodity prices, enhanced by the weaker dollar, have also contributed to the difference. A decline in oil prices could help alleviate some, but not all, of the negative drag petroleum products have had on the trade deficit.

WHOLESALE SALES AND INVENTORIES

Wednesday, Mar. 10, 10 a.m. EST

Wholesale inventories most likely grew 0.3% in January, according to the median forecast of economists queried by Informa Global Markets. In December, inventories increased by 0.5%, and grew 0.3% in November. Wholesale sales, meanwhile, grew 1% in December, after increases of 0.5% in November, and a 2% surge in October.

For the fourth quarter, wholesale inventories rose by an annualized 13.8%, the biggest increase since 1994. Expectations that inventory accumulation will accelerate this quarter most likely mean the inventory to sales ratio will bottom out at the historically low level of 1.18.

MEETING OF NOTE

Wednesday, Mar. 11, 10:00 a.m. EST

Federal Reserve Board Chairman Alan Greenspan testifies before the House Education and the Workforce Committee on U.S. education and innovation in Washington, D.C.

JOBLESS CLAIMS

Thursday, Mar. 11, 8:30 a.m. EST

First-time claims for jobless benefits for the week ended Mar. 6 most likely held steady at 345,000, say economists surveyed by Informa Global Markets. Jobless claims fell back to 345,000 in the week ended Feb. 28, after climbing to 355,000 in the prior period, from 344,000 for the week ended Feb. 14. The four-week moving average came down to 352,300, from 355,300 over the prior period.

For the week ended Feb. 14, continuing jobless claims held steady at 3.1 million. The four week moving average of continuing claims was virtually unchanged at 3.11 million.

RETAIL SALES

Thursday, Mar. 11, 8:30 a.m. EST

Retail sales probably rang up a 0.7% gain in February, following a 0.3% decline in January, a 0.2% increase in December, and a 1.1% surge in November. That's the median forecast of economists queried by Informa Global Markets. Excluding vehicles, December sales are expected to have risen by 0.7% as well. In January, retail sales less motor vehicles were up 0.9%, after a soft December rise of 0.2%, and a 0.8% gain in November.

After slowing to an annual pace of 16.1 million vehicles in January, February auto sales rebounded slightly to an annual rate of 16.4 million. At the same time, chain-store sales were reported up a strong 6.7% from a year ago. Based on the February forecast, retail sales would be 7.4% higher than the same period a year ago. Less autos, year ago sales would be up 7.7%.

IMPORT AND EXPORT PRICES

Thursday, Mar. 11, 8:30 a.m. EST

Import prices in February most likely rose 0.6%, say economists queried by Informa Global Markets. In January, import prices rose 1.3%, after two straight 0.5% increases in December and November, respectively. Excluding petroleum imports, January import prices still rose 0.7%, following consecutive 0.2% gains in the previous two months.

Foreign companies appear to be budging a little on prices. By holding prices of goods steady in dollar terms, foreign businesses have seen margins shrink. But with few signs that the dollar is going to rebound, companies may be increasing prices.

First, non-petroleum import prices are continuing on a gradual, but steady upward trend. Overall, non-petroleum import prices were up 1.5% from a year ago in January. In December, the yearly increase was 1.1%. More specifically, consumer goods prices are now up 0.4% from a year ago. Until November, 2003, prices of consumer-goods imports had been falling on a yearly basis since 1996. Capital goods prices are still on the decline, but the pace is slowing.

A similar trend is emerging for export prices. Export prices are expected to have risen by 0.3% in February. Excluding agricultural goods, export prices are up 1.4% from a year ago. While consumer goods prices for exports are on the rise, up 1% from a year ago in January, falling capital goods prices don't appear to be turning around yet.

FEDERAL BUDGET

Thursday, Mar. 11, 2 p.m. EST

The Treasury Dept. releases the details on the government's budget for February, the fifth month of fiscal year 2004. The median forecast of economists queried by Informa Global Markets is for a deficit of $92.3 billion. In January, the Treasury reported a deficit of $1.4 billion, following a $16.2 billion shortfall in December, and a $43 billion deficit in November. In February, 2003, the government rang up a $96.7 billion deficit.

The February deficit has some upside risk. Tax refunds, totaling $67.8 billion dollars last month, were $2.4 billion higher than February, 2003. Going forward, expectations of larger tax refunds and smaller tax payments could translate into wider deficits on a year ago basis.

The total deficit so far for fiscal year 2004 is $130.1 billion, compared with a $97.6 billion deficit through the first four months of fiscal 2003, and an $8.3 billion surplus over the same period in fiscal 2002.

MEETING OF NOTE

Friday, Mar. 12, 8:00 a.m. EST

Federal Reserve Board Chairman Alan Greenspan will deliver the main address at the Boston College Finance Conference 2004, "Wealth and Work in the 21st Century," in Boston.

CURRENT ACCOUNT

Friday, Mar. 12, 10 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 $136.5 billion in the fourth quarter, after coming in at $135 billion in the third quarter, from $139.4 billion in the second quarter, and 138.7 billion in the first quarter. The forecast $136.5 billion deficit would be about 5% of the gross domestic product, off from the recent peak of 5.8% of GDP in the first quarter.

However, foreign investors are still apprehensive about the current account and federal government's deficits. Concerns about America's ability to finance these deficits continue to put downward pressure on the U.S. dollar against the euro and other major currencies.

BUSINESS INVENTORIES

Friday, Mar. 12, 8:30 a.m. EST

Inventories held by manufacturers, wholesalers, and retailers probably grew 0.3% in January, say economists queried by Informa Global Markets. In December, inventories increased 0.3%, after expanding by 0.4% in November, October, and September, respectively. The second pass at fourth-quarter gross domestic product boosted the contribution rising inventories made to economic growth during the period. It was the first positive contribution to economic growth since the third quarter of 2002.

The inventory rebuilding process is expected to accelerate during this quarter. While retailers and wholesalers began restocking warehouses late last year, factories now appear to be slowly increasing inventories. The Commerce Dept. already reported that factory inventories were up 0.2% in January, but they are still down 1.1% from a year ago.

CONSUMER SENTIMENT INDEX

Friday, Mar. 12, 10 a.m. EST

The University of Michigan's Survey Research Center will report to its clients its initial index reading of consumer sentiment for March. News services will then report the index. Respondents to the Informa Global Markets economic survey expect the first look at consumer sentiment for March to nudge up to 94.5. In February, the index finished at 94.4, after reaching 103.8 in January, from 92.6 in December. The unexpected retreat in February was blamed on the weak recovery in jobs. Given the March employment report showing a very small uptick in jobs, it will be interesting to see how the index responds this month.

PRODUCER PRICE INDEX

The Bureau of Labor Statistics says the producer prices of finished goods report has been delayed for February (and thus January) data. Up to this point, however, the Labor Dept. has not yet published January data. According to the Bureau of Labor Statistics, "The delay was caused by unexpected difficulties in the conversion of PPI data from the Standard Industrial Classification system to the North American Industry Classification System."

In December, the latest available month, producer prices rose 0.3% and were up 4% from December, 2002. A drop in the annual rate is likely for February due to oil prices. In January, 2003, crude oil prices were on the rise in anticipation of the war in Iraq. Beyond February, the yearly rate could jump if current oil prices continue to linger near $36. During March, 2003, oil prices retreated from a high of $37 down to $31, and continued to slide until the end of April.

Excluding food and energy costs, core prices in December fell by 0.1% for the second consecutive month. Compared to the same month a year ago, core producer prices were up 1% in December. By James Mehring


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