Vital Signs for the Week of Aug. 30


Economic growth slowed down to an annual rate of 2.8% in the second quarter. However, a deeper look into the Commerce Dept.'s revised data for gross domestic product shows the domestic economy is doing better than previously thought.

The latest real GDP figure was revised lower because of foreign trade. The gap hit a record $55.8 billion in June. Take away the negative effect of trade and the economy shows annualized growth near 4%. Growth was stronger because both consumers and businesses spent more than originally thought. Consumer spending increased by 1.6%, up from 1% in the advanced report. Business spending jumped to an annualized pace of 13.1%, compared to 11.1%, and inventory growth accelerated.

There are reasons to believe that the economy can keep cruising along at a similar pace. The headwinds consumers faced this summer, including higher oil and gasoline prices, tempered consumer spending. However, the rebound in the University of Michigan's consumer sentiment index bodes well. Although the final reading of 95.9 fell sort of July's 96.7, it did improve from the preliminary reading of 94. This may indicate some upside risk for the Conference Board's August consumer confidence index.

ENERGY AS A TAILWIND? The recent slide in oil prices is credited for the second-half turnaround in August consumer confidence. What's more, the government's latest data show gasoline inventories remain steady, and with the summer driving season coming to a close, that could help push energy prices even lower.

If oil prices can keep falling, energy could turn into a tailwind for consumers. Cheaper oil would reduce pressure on gasoline and heating oil prices. That would help restore some of the purchasing power consumers lost this summer.

Of course, oil prices are volatile. That's why better job growth is still essential. Economists surveyed by Action Economics say payrolls rose by 150,000 in August, after a meager gain of 32,000 in July. Increased hiring is needed to lift personal income growth, bolster consumer confidence, and fuel consumer spending.

Outside of the recent slowdown in hiring, businesses still show a lot of confidence. The consensus forecast for factory goods orders from Action Economics is for a 1.1% gain in July. In addition, both ISM reports are expected to show business activity remains quite healthy.

So the U.S. economy is still doing well and much better than the revised headline GDP number indicates.

Here's the weekly economic calendar.

MEETING OF NOTE

Monday, Aug. 30 Thursday, Sept. 2

The Republican National Convention is held in New York. The party will officially nominate George W. Bush as its candidate for U.S. President.

PERSONAL INCOME AND CONSUMER SPENDING

Monday, Aug. 30, 8:30 a.m. EDT

Personal income probably grew at a faster clip in July. Economists queried by Action Economics expect an increase of 0.5%. Income in June rose 0.2%, following gains of 0.6% in both May and April. Although job growth hasn't lived up to expectations lately, it is improving and should help lift the overall measure of income.

Outlays on goods and services most likely rose 0.7%, reversing a 0.7% fall in June. The strong July retail sales figures point to a healthy consumer spending figure. A pickup in income will be key for fueling consumer spending. Energy costs appear to be weighing on consumers. In addition, any spending stimulus from last year's federal tax cuts has probably run its course.

EARNINGS REPORTS

Tuesday, Aug. 31

Albertson's, Zale Corporation, and more.

ICSC-UBS STORE SALES

Tuesday, Aug. 31, 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. 28. In the week ended Aug. 21, seasonally adjusted sales rose 0.1%, after falling 0.6% in the week ended Aug. 14, and a 0.1% gain in the prior week.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, Aug. 31, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the fourth and final fiscal week of the month, ended Aug. 28. Through the first three weeks, ended Aug. 21, sales were off 1% compared to the same period in July. Over the first two weeks, sales were down 0.6% vs. the same period in July. For the full month of July, sales were down 0.1% from June.

CONSUMER CONFIDENCE INDEX

Tuesday, Aug. 31, 10 a.m. EDT

Is the slowdown in employment draining consumer confidence? Economists queried by Action Economics are forecasting a decline in the Conference Board's August index of consumer confidence. The median forecast for August is a reading of 102.8. In July the index rose to 106.1, from 102.8 in June, and 93.1 in May.

In the July report the Conference Board pointed to the spring upturn in hiring as the source for stronger consumer confidence. The July report showed the percentage of consumers expecting the job market to worsen fell to 13.1%, from 16.8% in June. At the same time, those who believe the job market will improve was 19.4%, a small decline from the June level of 19.9%. Further improvement in confidence largely hinges on whether or not businesses add workers at a pace closer to 200,000 vs. July's meager 32,000.

CHICAGO PURCHASING MANAGERS SURVEY

Tuesday, Aug. 31, 10 a.m. EDT

The Chicago-area purchasing managers' index of industrial activity in the Midwest probably cooled off some in August. According to the median forecast of economists queried by Action Economics, the August reading will be 60%. In July the index jumped back up to 64.7%, from 56.4% in June, but remained below the recent peak of 68% registered in May. The forecast level for the regional activity index is still relatively good.

The production, new-orders, and backlogged-orders indexes all turned higher again in July, with the unfilled-orders index hitting a ten-year high. However the employment index declined, falling to 45.6%, the lowest in 12 months. A reading below 50% indicates that more manufacturers reported job cuts than hiring. Indeed, only 14% reported adding workers, while 26% said they trimmed payrolls.

VEHICLE SALES

Wednesday, Sept. 1

Sales of domestic and imported cars and light trucks during August probably came in at an annual pace of 17.4 million vehicles, according to Ward's Automotive Reports. The August forecast is a small improvement from the pace of 17.3 million in July.

There is a lot of risk to the forecast. This year's August sales figures won't include the Labor Day weekend. In addition, sales on Aug. 1 were included in the July data since it came on a weekend. Because of these factors, it may be hard to decipher anything about consumer spending from the August results.

MORTGAGE APPLICATIONS

Wednesday, Sept. 1, 7 a.m. EDT

The Mortgage Bankers Assn. releases its tally of mortgage applications for both home buying and refinancing for the week ending Aug. 27. In the week ended Aug. 20, the purchase index slipped to 443.7, from 467.1 in the prior week, but remained above the 440 posted for the period ended Aug. 6. The latest reading of the four-week moving average was virtually unchanged at 450.7, after rising to 451 in the week ended Aug. 13.

The average rate on a conventional 30-year mortgage, according to HSH Associates, declined to 5.96% in the week of Aug. 20, from 5.99% in the week ended Aug. 13.

The refi index also declined. Over the week ended Aug. 20, the index slipped to 1824.9, from 1982.7 for the week of Aug. 13, and 1640.5 in the previous period. The refi index four-week moving average, however, rose to 1762.1, from 1718.1 in the period ended Aug. 13.

ISM SURVEY

Wednesday, Sept. 1, 10 a.m. EDT

The Institute for Supply Management's August index of industrial activity probably cooled a little. The consensus forecast among economists surveyed by Action Economics is for reading of 60%. The July reading was 62%, up slightly from the 61.1% posted for June.

Respondents said that new orders and production grew at a faster clip in July. The order index hit 64.7%, after slipping to 60% in June. The production reading for July was 66.1%, after a reading of 63.2% in June.

Demand is strong enough for manufacturers to keep hiring, although not as many said they added workers in July. The employment index slipped to 57.3%, from 59.7% in June. In July, 25% of respondents reporting an increase in payrolls, compared to 35% in June.

CONSTRUCTION SPENDING

Wednesday, Sept. 1, 10 a.m. EDT

Construction spending rebounded in July, according to economists surveyed by Action Economics. After falling 0.3% in June, the consensus estimate for July is a 0.4% gain. In May spending increased 0.1%, following jumps of 1.3% in April, and 2.3% in March.

Private homebuilding dragged spending down in June, falling by 0.6%. The housing sector has been the primary engine of construction activity. If the economy keeps growing at a healthy clip, there could be some shift in construction activity. As demand strengthens, non-residential construction should improve. At the same time, interest rates are likely to keep rising, which would crimp residential construction outlays.

CHAIN STORE SALES

Thursday, Sept. 2

The International Council of Shopping Centers will release its August same-store sales figures for major U.S. chain retailers. In July receipts grew by just 3.1% from the same period a year ago. In June the yearly gain in sales was 3%, following a 5.7% gain in May. The August number may not be too strong. Weekly retail sales figures during August have been a little weaker than July. In addition, Wal-Mart lowered its August estimate for sales from a range 2% to 4% growth, to 0% to 2%.

JOBLESS CLAIMS

Thursday, Sept. 2, 8:30 a.m. EDT

First-time claims for jobless benefits for the week ended Aug. 28 are expected to ease to 335,000, according to the median forecast of economists surveyed by Action Economics. Jobless claims posted moved back up to 343,000, from an upwardly revised 333,000 in the week ended Aug. 14, and 334,000 for the prior period. The Labor Dept. said the latest figure was affected by hurricane Charley.

The four-week moving average inched down to 336,800, from 337,500, over the week ended Aug. 14. Over the week of Aug. 14, continuing jobless held at 2.9 million.

PRODUCTIVITY AND COSTS

Thursday, Sept. 2, 8:30 a.m. EDT

A second pass at productivity growth in the second quarter, measured as output per hour worked, is expected to show a small downward revision. The median forecast of economists surveyed by Action Economics calls for a 2.7% increase at an annualized rate. The Labor Dept. originally reported an annualized 2.9% improvement from the first quarter. During the first three months, output per hour rose by an annualized rate of 3.7%, after a 3.1% gain in the fourth quarter of 2003, and 9% in the third quarter.

Second-quarter unit labor costs most likely grew by an upwardly revised 2.1%, compared to the originally reported 1.9% annualized gain. In the first quarter unit labor costs increased by an annualized rate of 0.3%, compared to a 1.2% jump in the fourth quarter of 2003, and a 2.7% plunge in the third quarter. In both 2003 and 2004 unit labor costs fell.

If job growth returns to its spring pace, then productivity will slow. That's because new workers are likely to be less productive then current workers due to experience and other factors. Lower productivity growth means costs for each unit of goods produced rises.

Labor costs typically stoke price inflation when unit labor costs increase at a faster pace than consumer prices. Right now, the consumer price index is up 3.0% from a year ago, although the yearly pace is just 1.8% after food and energy are excluded.

MANUFACTURERS' SHIPMENTS, INVENTORIES, AND ORDERS

Thursday, Sept. 2, 10 a.m. EDT

July factory orders probably grew by 1.1%. That's the median forecast of respondents surveyed by Action Economics. In June orders rose 0.7% after an upwardly revised gain of 0.4% in May. Published data on new orders for durable goods showed an increase of 1.7% for July.

The forecast gain for July could help to ease worries about the economy's soft performance in recent months. Beyond the overall gain in new orders, the breakdown of orders can shed light on what type of capital investments are being made. The July durable goods report was mixed. Excluding the volatile transportation sector, new orders were up 0.1%. Orders for new computers were off 6.7% for the month of July. At the same time orders for machinery and electrical equipment posted solid gains.

Unfilled orders of durable goods rose by 1.2% in July, after two consecutive monthly increases of 0.6%. Just like new orders, the increase in unfilled orders was concentrated in the transportation sector.

EMPLOYMENT REPORT

Friday, Sept. 3, 8:30 a.m. EDT

A pickup in job growth is anticipated once again. The median estimate of economists from Action Economics is a 150,000 increase in employer payrolls. The July report showed a meager gain of 32,000, a revised gain of 78,000 in June, and 208,000 for May. The August gain in payrolls is not expected to lower the unemployment rate, currently at 5.5%. That is tied to a growing number of people renewing their job searches as the economy improves.

The consensus forecast calls for a gain of 10,000 factory jobs, after increasing by 10,000 in July. Recent regional and national factory activity indexes have been mixed with regard to hiring. The national ISM survey, which comes out on Sept. 1, may provide some insight into factory hiring ahead of this report.

The average workweek very likely held at 33.7 hours, after dropping to 33.6 hours in June from 33.8 hours in May. Meanwhile gains in average hourly earnings are expected to rise by 0.2%, from 0.3% in July.

ISM NON-MANUFACTURING SURVEY

Friday, Sept. 3, 10 a.m. EDT

The Institute for Supply Management releases its August index of business activity in the mostly services, non-manufacturing sector. The median forecast of economists surveyed by Action Economics is a reading of 63%. In July the index hit 64.8%, after slipping to 59.9% in June, from 65.2% in May.

The July improvement in the headline index was complemented by a gain in new orders. The orders index jumped to 66.4%, from 62.4% in June. However the employment index fell sharply, to an even 50%, the official inflection point between rising and falling payrolls. In June the index stood at 57.4%.


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