Vital Signs for the Week of Aug. 16


The July employment report was far from the summer blockbuster that the consensus around Wall Street had predicted. Indeed, some economists dashed for the whiteout and rewrote their reviews for economic growth. However, it appears that Federal Reserve Chairman Alan Greenspan and company still see the economy turning in a solid, if not stellar, performance.

The announcement following the Federal Reserve's Aug. 10 meeting remained optimistic. While giving a nod to higher oil prices being an economic drag, the Fed said, "the economy nevertheless appears poised to resume a stronger pace of expansion going forward."

The Fed's resilient view was bolstered with the July retail sales figures. While the 0.7% increase was a bit below expectations, the May estimate was revised up from a 1.1% decline, to a smaller 0.5% fall, and was up 0.3% once autos were excluded. If the June figure had not been revised higher, July sales would have been up by 1.4%, exceeding the 1.1% forecast. The report helps ease worries that consumers aren't shopping.

What's more, the manufacturing rebound should continue its supporting role in fueling economic growth. After a disappointing 0.3% fall in June, economists surveyed by Action Economics see July output rising by 0.5%. Earlier data certainly looks positive. The July jobs report showed factory payrolls rose, and the average workweek improved a little. The hours worked are used by the Fed in calculating industrial output.

In addition, the Institute for Supply Management's July survey of national factory activity accelerated, while economists believe the regional reports by the Philly and New York Federal Reserve Banks should remain at healthy levels.

As long as oil prices continue to creep higher, concerns about the potential negative impact on growth will heighten. On Aug. 12, crude oil prices hit yet another record high, topping $45 per barrel. Large gasoline inventories in the U.S. are preventing gas prices from following oil higher. But the longer oil prices rise, the greater the chance gas will follow.

For now, the central bank says it still doesn't see any plot twists for the economy. However, the minutes from the two-day June 29-30 meeting showed an increased focus on inflation. While factors that have pushed prices higher were still considered "transitory" in the Aug. 10 post-meeting note, there is rising uncertainty among Fed officials about their personal forecasts for inflation.

If businesses are gaining some further ability to pass on higher costs to consumers and oil prices stay high, there's likely to be some downward pressure on growth and upward pressure on inflation. It remains to be seen how this will affect the Fed's future stance on interest rates.

EARNINGS REPORTS

Monday, Aug. 16

Lowe's Cos., SYSCO, and more.

EMPIRE STATE MANUFACTURING SURVEY

Monday, Aug. 16, 10 a.m. EDT

The New York Federal Reserve Bank will release its August survey of business conditions for manufacturers in the New York Fed district. According to Action Economics, the headline manufacturing activity index probably eased back to 32. In July, the index rebounded from 29.9 in June to 36.5, the highest reading since February.

The July report showed an uptick in the new orders index, to 29.4, from 26.2 in June. And the respondents are still unable to keep up with the current pace of orders, as the index tracking unfilled orders jumped back up to 15.22, from 9.9 in June, and just shy of the record 15.7 in May.

The continued strength of the factory sector in the region has manufacturers lifting their payrolls. In July, 27.8% of respondents said they increased payrolls, compared with 21.3% in June, and 28% in May. However, the percentage of those saying they cut payrolls also increased, to 13.8%, from 8.6% for June.

Those surveyed are also still optimistic about the second half of the year. The general business conditions index for the next six months eased to 53.9 in July, from 54.2 in June. Respondents see new orders and shipments growing at a faster clip. However, manufacturers are assuming they can ratchet up production, as the index for unfilled orders fell to 17.6 in July, from 25.2 in June.

HOME BUILDERS SURVEY

Monday, Aug. 16, 1 p.m. EDT

The National Association of Home Builders will release monthly survey results for August. The report updates housing market conditions by measuring builders' assessments of current sales, buyer traffic through model homes, and expected demand.

In July, the index declined for a second straight month, easing to 67, from 68 in June, and 69 in May. The index tracking the prospective buyer traffic fell to 50, from 53 in June and 55 in May. The index of single-family home sales held firm at 73, while the index tracking homebuilders' expectations for sales over the next six months nudged down to 73, from 74 June.

EARNINGS REPORTS

Tuesday, Aug. 17

Applied Materials, Deere & Co., Home Depot, J.C. Penney, Network Appliance, Staples, TJX, and more.

ICSC-UBS STORE SALES

Tuesday, Aug. 17, 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 Aug. 14. In the week ended Aug. 7, seasonally adjusted sales improved by 0.1%, after three straight weeks of 0.2% gains.

CONSUMER PRICE INDEX

Tuesday, Aug. 17, 8:30 a.m. EDT

Inflation crept a little higher in July, as consumer prices for all goods and services are forecast to have increased by 0.1%. That's the median forecast of economists surveyed by Action Economics.

Consumer prices climbed 0.3% in June, following a 0.6% May increase, and a 0.2% rise in April. In the second quarter, the consumer price index rose by an annualized pace of 4.8%, following a 5.1% increase in the first quarter. The latest price increases pushed the June CPI reading to 3.3% above its year-ago level.

Energy and food prices have been the primary culprits in this year's inflation gains. Excluding those more volatile items, prices probably rose 0.2% in July, after core inflation ticked up by 0.1% in June, and 0.2% in May. During the second quarter, core inflation rose at an annualized pace of 2.3%, after rising 2.9% in the first quarter of 2004. The yearly rate of core inflation is also rising more slowly than the overall index, up 1.9% in June from a year ago.

REAL EARNINGS

Tuesday, Aug. 17, 8:30 a.m. EDT

Inflation-adjusted weekly earnings of production workers probably improved in July. The July employment report's figures showed a 0.6% increase in average weekly earnings and the economists are forecasting a 0.1% increase in the consumer price index for July. That would put real earnings growth at 0.5% for July, following a 0.8% decrease in June. Compared with the same period a year ago, real earnings in June were down 1.4%.

NEW RESIDENTIAL CONSTRUCTION

Tuesday, Aug. 17, 8:30 a.m. EDT

The housing market continues to roll along. Housing starts probably rebounded to an annual pace of 1.89 million in July. That's the median estimate of economists surveyed by Action Economics.

The number of June housing starts fell to an annual rate 1.8 million, from 1.97 million in May, and 1.96 million in April. Even with the June dip, housing starts are still on pace for a stellar performance this year.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, Aug. 17, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the second fiscal week of August, ended Aug. 14. In the first week, ended Aug. 7, sales were off 0.5% compared with the same period in July. For the full month of July, sales were down 0.1% from June.

INDUSTRIAL PRODUCTION

Tuesday, Aug. 17, 9:15 a.m. EDT

Factory output turned around in July. The consensus among economists surveyed by Action Economics is for a 0.5% gain during July. In June, industrial output fell 0.3%, following a 0.9% gain in May, and a 0.8% jump in April.

Despite the June decline, output rose at an annualized rate of 6% in the second quarter, after a 6.6% gain in the first period, and a 5.6% gain in the final quarter of 2003.

The latest series of manufacturing-related data show business should remain healthy for the rest of the year. The national and regional factory activity surveys by and large point to a rebound in production and demand in July, after many slipped in June.

Manufacturers also reported rebounds in new orders, and the latest Commerce Dept. figures back up their responses. The June report of durable goods orders showed a 0.7% gain in June orders, and a revised May figure of 0.4% growth, from an original fall of 0.3%.

However, the sense of economic uncertainty and higher oil prices are a wild card. If businesses become cautious and defensive, new and unfilled orders, and thus future factory activity, could evaporate.

The average operating rate for all industries probably rebounded to 77.5%, after slipping to 77.2% in June, from 77.6% in May. As factory activity keeps expanding, capacity utilization should steadily rise.

However, the rate of improvement in utilization may slow with capacity growth beginning to tick higher. Industrial capacity expanded at an annualized rate of 1.7% in the second quarter, the quickest rate of growth since the second quarter of 2002, although still a historically anemic pace.

EARNINGS REPORTS

Wednesday, Aug. 18

Hewlett-Packard, Intuit, and more.

MORTGAGE APPLICATIONS

Wednesday, Aug. 18, 7 a.m. EDT

The Mortgage Bankers Association releases its tally of mortgage applications for both home buying and refinancing for the week ending Aug. 13. In the week ended Aug. 6, the purchase index retreated to 440, from 452 over the prior week, and 444.8 in the week ended July 23. The latest reading of the four-week moving average fell to 444.3, from 451.5 in the period ended July 30.

The average rate on a conventional 30-year mortgage, according to HSH Associates, eased to 6.13% for the week of Aug. 6, from 6.2% in the week ended July 30.

The refi index managed its first increase in five weeks, rising to 1640.5, from 1600.3 in the week ended July 30, but still below the 1648.8 level for the week ended July 23. The refi index four-week moving average, however, slowed to 1635.2, from 1640.7 in the period ended July 30.

EARNINGS REPORTS

Thursday, Aug. 19

Autodesk, Barnes & Noble, Ciena, Gap, Limited Brands, Nordstrom, Novell, Winn-Dixie Stores, and more.

JOBLESS CLAIMS

Thursday, Aug. 19, 8:30 a.m. EDT

First-time claims for jobless benefits for the week ended Aug. 14 are expected to edge up to 335,000, according to the median forecast of economists surveyed by Action Economics. Jobless claims posted an unexpected fall in the week ended Aug. 7, to 333,000, from 337,000 for the period ended July 31, and 346,000 for the prior week. The easing in jobless claims from a level of 350,000 in the second week of July would appear to indicate improving, not deteriorating, employment conditions.

The four-week moving average fell to 339,300, from 343,500 in the week ended July 31. For the week of July 31, continuing jobless remained unchanged at 2.9 million filings.

LEADING INDICATORS

Thursday, Aug. 19, 10 a.m. EDT

The Conference Board's composite report of leading economic indicators for July very likely dipped by 0.1%, based on the median forecast of economists queried by Action Economics. A weak stock market offset a rebound in the average manufacturing workweek and increases in factory orders. In June, the index fell 0.2%, after a 0.4% gain in May.

Based on the July forecast, the index would be up about 3% from a year ago, down from the 3.7% pace in June, and the lowest yearly reading since December. According to the Conference Board, however, the current yearly pace is still in line with an annualized economic growth rate of 4% to 5% in the short term.

PHILADELPHIA FED SURVEY

Thursday, Aug. 19, 12 p.m. EDT

The Philadelphia Federal Reserve Bank will release its August survey of business conditions for the mid-Atlantic region. The consensus forecast of economists surveyed by Action Economics calls for the index of general business conditions to fall to 32. For July, the index moved up to 36.1, from 28.9 in June and 23.8 for May.

The indexes tracking shipments, new orders, and unfilled orders all moved up smartly in July, a sign that activity should remain strong in the short term. That's further confirmed by the improvement in the employment index. The July reading hit a record 24.6, up from 16.8 in June, and 22.6 in May.

However, manufacturing executives have toned down their enthusiasm for the coming six months. The general business activity index slipped to 36.3, from 39.5 in June, and 42.5 in May. Future expectations for shipments and unfilled orders were higher, but the new orders reading was down slightly. By Kathleen Madigan


Steve Ballmer, Power Forward
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