Vital Signs for the Week of July 5


The U.S. economy is entering a new phase. After a breakout second half in 2003, with real gross domestic product growing by an annual rate of 6%, it appears to be slowing down. Indeed, in the first quarter of the year, real GDP unexpectedly slowed to an annualized rate of 3.9%.

The deceleration appears to run across much of the economy. After a stellar first half, there are some signs that manufacturing is settling down. The June factory activity report from the Institute for Supply Management showed some deceleration in activity. The headline index fell to 61.1%, the lowest reading since last October. Still, such a reading still indicates respectable growth in the factory sector. A number above 50% is associated with an expanding sector.

A decline is also expected in the ISM's non-manufacturing report. The median forecast of economists surveyed by Action Economics is for 64.5% in June, after tallying a record reading of 68.4% in April.

Slower growth is in line with consumer activity of late. Recent weekly retail sales have softened a little. A measure of sales put together by the International Council of Shopping Centers and UBS bank has slipped in four of the past seven weeks, and the Instinet Redbook report on store sales currently shows they're flat for June. What's more, Wal-Mart (WMT) and Target (TGT) said results in June would be disappointing.

A downshift in the economy is not necessarily a bad thing. Nor would slower growth be a surprise. The latest survey of economists surveyed by BusinessWeek shows that they expect growth to come in close to 4% over the second half of 2004.

Such a pace would be strong enough to keep producing healthy job increases. Economists still believe monthly increases north of 200,000 are likely, despite the disappointing June results. More jobs and the current trend of decent gains in personal income -- real after-tax income was up 3.8% from a year ago in May -- should also propel consumer spending and help offset some of the negative effects that higher interest rates will have on the housing sector.

An economy expanding at 4%, rather than 6%, could also be a positive when in comes to inflation. Growth at 4% will still cause businesses to dust off unused equipment and other excess capacity in order to meet demand. However, the rate at which excess capacity gets used should be slower. That would give the Federal Reserve some breathing room as it starts the long process of raising interest rates.

Here's the weekly economic calendar.

Financial markets in the U.S. will be closed on Monday in observance of the July 4 holiday.

MEETING OF NOTE

Tuesday, July 6, 8:45 a.m. EDT

Federal Reserve Bank of Richmond President Alfred Broaddus speaks on the economy at a conference sponsored by the Southeastern Association of Tax Administrators in Asheville, N.C.

ISM NON-MANUFACTURING SURVEY

Tuesday, July 6, 10 a.m. EDT

The Institute for Supply Management releases its latest index of business activity in the mostly services, non-manufacturing sector. The median forecast of economists queried by Action Economics has the June reading coming in at 64%. The May headline figure was 65.2%, down from the record reading of 68.4% in April, which broke the previous high of 65.8% in March.

The new orders index eased to 61.3%, from 65.5% in April. However, only 11% of respondents reported outright declines in the level of new orders, with entertainment the only industry to report a contraction in new orders. However, there was acceleration in the growth of unfilled orders. With demand still strong, non-manufacturers are also picking up the pace of hiring. The employment index jumped to 56.3%, from 54.5% in April.

Non-manufacturers continue to report greater price pressures. The index tracking prices paid by respondents kept climbing. The May reading reached 74.4%, from 68.6% in April. The percentage of those surveyed who reported higher prices paid for materials and services hit 55% compared to 19% at the end of 2003.

MEETING OF NOTE

Wednesday, July 7, 12 p.m. EDT

Federal Reserve Board Vice-Chairman Roger Ferguson speaks at the New York Association for Business Economics in New York City.

EARNINGS REPORTS

Accenture, ALCOA, Genentech, Yahoo!, and more.

MORTGAGE APPLICATIONS

Wednesday, July 7, 7 a.m. EDT

The Mortgage Bankers Assn. releases its tally of mortgage applications for both home buying and refinancing for the week ending July 2. In the week ended June 25, the purchase index fell back to 435.4, from 454.5 in the previous week, and 449.5 over the period ended June 11. The latest reading of the four-week moving average retreated to 442.9, the lowest level since late March. The average rate on a conventional 30-year mortgage, according to HSH Associates, eased back to 6.37% for the week of June 25, from 6.46% over the week ended June 18.

The refi index also fell over the week ended June 25, to 1386.9. In the week ended June 18, the index stood at 1454.6, from 1479.4 over the period ended June 11. The refi index four-week moving average dropped to 1421, after sliding to 1470.2 in the week ended June 18.

ICSC-UBS STORE SALES

Wednesday, July 7, 7:45 a.m. EDT

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 July 3. In the week ended June 26, seasonally adjusted sales tumbled by 1.2%, following a gain of 0.1% in the week ended June 19, and two consecutive gains of 0.2%.

INSTINET REDBOOK RESEARCH STORE SALES

Wednesday, July 7, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the fifth and final fiscal week of June, ended July 3. During the fourth week of June, sales were flat compared to the same period in May. Over the full month of May, sales stood 0.5% higher when compared to April.

MEETING OF NOTE

Tuesday, July 8

Pepsi Bottling Group, and more.

CHAIN-STORE SALES

Thursday, July 8

The International Council of Shopping Centers will release its June same-store sales figures for major U.S. chain retailers. In May, receipts grew by 5.7%. The healthy pace of growth during the year is very positive on top of the recent upswing in consumer sentiment and the Commerce Dept.'s data on retail sales -- up 8.9% from a year ago in May.

There appears to be some risk of weaker results for June. Both Target and Wal-Mart warned that June sales would come in weaker than previously anticipated. Wal-Mart blamed cool weather and soft Father's Day shopping for the underperformance.

JOBLESS CLAIMS

Thursday, July 8, 8:30 a.m. EDT

First-time claims for jobless benefits for the week ended June 26 probably fell back to 340,000, according to the consensus forecast of economists surveyed by Action Economics. Jobless claims inched up to 351,000, from a un upwardly revised level of 350,000 for the week ended June 19, after falling to 336,000 over the prior period, from 351,000 for the week ended June 5. Although jobless claims have been creeping higher over the past couple weeks, they are still at levels associated with healthy job gains. Currently, economists believe the level is a more important indicator of the labor market's health than the recent movements.

The four-week moving average moved up to 347,000, from 344,500 over the week ended June 19. Also during the week of June 19, continuing jobless stood at 2.97 million, up slightly from 2.95 million set during the previous week.

CONSUMER INSTALLMENT CREDIT

Thursday, July 8, 3 p.m. EDT

Consumers most likely accumulated another $7.5 billion in debt during May. That is the consensus forecast of economists surveyed by Action Economics. Total credit outstanding ticked up $3.9 billion in April, following a $9.3 billion increase in March, and a $2.5 billion gain over February.

Acceleration in debt accumulation over 2004 looks possible given the economic scenario. With the economy settling into a healthy pace of growth, consumer demand should hold up. A better labor market and rising personal incomes will also support further consumer spending and borrowing. So far this year, consumers have reluctant to take on more revolving debt, made up mostly of credit cards. In the past three months through April, the overall increase in revolving credit has been $150 million. Part of the reason for the subdued increase could be that some consumers are using tax refund money to improve their personal balance sheet. However, that trend should begin to fade.

MEETING OF NOTE

Friday, July 9, 1 p.m. EDT

Federal Reserve Bank of Kansas City President Thomas Hoenig discusses monetary policy and the economic outlook in Columbus, Neb.

MEETING OF NOTE

Abbott Laboratories, General Electric, and more.

WHOLESALE SALES AND INVENTORIES

Friday, June 9, 10 a.m. EDT

Wholesale sales most likely grew 0.5% in May. That is the median forecast of economists surveyed by Action Economics. In April, sales increased by 0.8%, after a stout 2.9% gain in March, and 2.1% jump in February. Based on the May forecast, sales likely came in at a strong annual pace of 15.6%, from 15.1% in April.

April wholesale inventories were trimmed by 0.1%, after a 0.5% increase over March. The lopsided pace of sales compared to inventories pushed the inventory to sales ratio down to 1.12. That is a record low. Inventories are rising moderately, up 3.7% from a year ago in April. However, businesses may increasingly feel the need to ratchet up warehouse restocking as economic demand looks increasingly more durable. By James Mehring


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