Vital Signs for the Week of July 11


The economy is primed for a solid second half. Second-quarter economic growth is expected to have slowed down as manufacturers and other businesses adjusted their inventories. But the job market is still growing at a solid, if unspectacular, clip, consumers are gassing up and driving to the mall, and inflation appears to be under control.

June job growth of 146,000 came in under the consensus view of 190,000. However, the May and April figures were revised up, bringing the three-month average to a healthy 181,000. The unemployment rate fell to 5%, from 5.1% in May. While the labor report didn't show big gains in wages, the additional workers will help fuel consumer spending.

Indeed, retail sales are expected to have jumped 0.7% in June. The Commerce Dept. data will likely show the gains came from both strong June auto sales and summer-related shopping. What's more, despite a rebound in oil prices, the preliminary gauge of consumer sentiment from the University of Michigan will likely stay close to the June level, when the index turned considerably more upbeat. More jobs and a brighter outlook by consumers bode well for retailers in the coming months.

What's more, there are some small indications that businesses may be gaining some confidence as well. Industrial production very likely posted a second straight month of solid expansion after skidding a little in March and April. The optimism for June factory output was boosted by a rise in the Institute for Supply Management's June factory activity index.

Also key to the second half is inflation. Consumer prices have been drifting higher, but not too fast to crimp consumer purchasing power or lead the Federal Reserve to ramp up its monetary tightening. That trend is expected to have continued in June.

One area to keep an eye on is service sector inflation, which climbed to 3.1% from a year ago in May, vs. an overall pace of 2.8% and 2.2% when excluding food and energy. Producer prices show easing price pressures in commodities. However, job gains are coming largely in the service sector and the ISM's nonmanufacturing activity index shows robust demand for services. The data imply that the economy should pick up the pace in the second half of the year causing the Fed to remain vigilant in its monetary tightening.

Here's the week's economic calendar.

MEETING OF NOTE

Monday, July 11, 8 a.m. EDT

Federal Reserve Bank of Richmond President Jeffrey Lacker makes introductory remarks at a neighborhood development conference in Richmond, Va.

EARNINGS REPORTS

Tuesday, July 12

M&T Bank Corporation, Marshall & Ilsley, PepsiCo, and more.

ICSC-UBS STORE SALES

Tuesday, July 12, 7:45 a.m. EDT

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ending July 9. In the week ended July 2, sales rebounded 0.5%, following a 0.6% decline in the previous period, and a 0.1% gain in the week ended June 18.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, July 12, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the first fiscal week of July, ended July 9. In the entire month of June, ended July 2, sales were up 0.5% compared with May. Sales during May were up 2.5% vs. April.

MEETINGS OF NOTE

Wednesday, July 13, 9 a.m. EDT

Federal Reserve Bank of Philadelphia President Anthony Santomero gives a speech entitled "Retail Banking Risk: What Drives Consumer Risk?" at a conference hosted by the Consumer Bankers Assn. and the Risk Management Assn. in Chicago.

1 p.m. EDT

Office of Management and Budget Director Joshua Bolton holds a briefing on the fiscal year 2005 Mid-Session Review.

7:15 p.m. EDT

Federal Reserve Bank of Cleveland President Sandra Pianalto speaks about regional issues in Akron, Ohio.

EARNINGS REPORTS

Wednesday, July 13

Abbott Laboratories, Advanced Micro Devices, Apple Computer, BB&T, Gannett, Harley-Davidson, Yum! Brands, and more.

MORTGAGE APPLICATIONS

Wednesday, July 13, 7 a.m. EDT

The Mortgage Bankers Assn. releases its numbers on mortgage applications for both home buying and refinancing for the week ending July 8. In the week ended July 1, the purchase index zoomed up to 520.8, from 477.4 in the week ended June 24, and 479.4 in the previous period. The four-week moving average, climbed to 501.7, from 491.4 for the week ended June 24.

The average rate on a conventional 30-year fixed mortgage, according to HSH Associates, retreated to 5.72% during the week ended July 1. For the week ended June 24, the mortgage rate stood at 5.78%.

The MBA's refi index rose as well. In the period of July 1, the index moved up to 2788.2, from 2529.2 for the week ended June 24, and 2575 in the week ended June 17. The four-week moving average climbed to 2715 for the period ended July 1, from 2608.4 in the period ended June 24.

INTERNATIONAL TRADE

Wednesday, July 13, 8:30 a.m. EDT

The monthly trade deficit is forecast to held steady in May. The consensus view among economists is for a U.S. trade deficit for goods and services of $57 billion. The trade gap in April was also $57 billion, up from $53.6 billion in March.

In April, both exports and imports increased. The $106.4 billion of exports was a monthly record, as was the $163.4 billion in imports. Once again, exports of civilian aircraft provided the biggest lift, with a monthly increase of $928 million from March. Exports of fuel oils and chemicals also showed sizeable gains. Since export and imports are measured by dollar value and not volume, higher oil prices had a lot to do with the monthly movement in the trade report. Crude oil imports grew by $551 million.

IMPORT AND EXPORT PRICES

Wednesday, July 13, 8:30 a.m. EDT

Import prices most likely posted a 1% gain during June. That's the median forecast from Action Economics. In May, import prices sank 1.3% as oil prices eased. In April, import prices jumped 1.2%, after surging by 2.2% in March. Excluding petroleum, import prices were down just 0.3% in May, and rose a more moderate 0.4% in April, and 0.3% in March. Overall, import prices were up 5.7% from a year ago in May and just 2.5% when excluding oil.

June export prices probably increased 0.2%, after slipping 0.1% in May, and rising 0.6% in April. Compared with a year ago, export prices were up 2.7% in May after slowing to a yearly pace of 3.2% in April, from 3.3% in March. Falling prices of agricultural products have been the biggest drag. However, price increases on capital and consumer goods also appear to be easing. Compared with a year ago, the capital goods price index for exports was up 0.3% in May, after reaching a rate of 0.9% in January.

FEDERAL BUDGET

Wednesday, July 13, 2 p.m. EDT

The federal government is forecast to have run a $28-billion budget surplus in June. That's the consensus among economists surveyed by Action Economics. Last year, the June surplus was $19.1 billion. The improved economy has caused the increase in tax receipts to outpace the rise in spending so far this year. As it stands right now, the full fiscal year deficit will end up considerably below the Office of Management and Budget's February forecasted level of $426.6 billion. Through May, the eighth month of fiscal year 2005, the deficit stands at $272.2 billion. In fiscal year 2004, the deficit grew by $66.5 billion over the final four months.

EARNINGS REPORTS

Thursday, July 14

Fifth Third Bancorp, Genzyme, Knight Ridder, Marriott International, MGIC Investment, Southwest Airlines, Tribune, UnitedHealth Group, and more.

JOBLESS CLAIMS

Thursday, July 14, 8:30 a.m. EDT

First-time claims for jobless benefits for the week ended July 9 most likely grew to 322,000. Jobless claims moved up to 319,000 in the week ended July 2, after easing to an upwardly revised 312,000 in the prior week, from 316,000 for the week of June 18.

The four-week moving average fell for a third straight week, to 320,500, from 323,500 during the previous period. Continuing jobless claims for the week ended June 25 slipped to 2.58 million, from 2.6 million.

RETAIL SALES

Thursday, July 14, 8:30 a.m. EDT

Retail sales probably turned around in June. The median forecast of economists surveyed by Action Economics calls for a 1% gain. Strong June auto sales probably had a lot to do with the improved performance. The annual rate of light vehicle sales was 17.5 million in June, after slipping to a pace of 16.6 million in May.

Monthly retail sales shrank 0.5% in May, after a 1.5% surge in April. Excluding autos, economists expect a 0.5% gain in retail sales for June. May sales were off 0.2% and April sales less autos were up 1.4%.

The monthly chain store sales report from the International Council of Shopping Centers bodes well for the June retail sales figures. Compared with the same period a year ago, June sales were up 5.3%. Hotter weather caused consumers to flock into air-conditioned malls and super stores to buy more summer clothing and other seasonal items.

CONSUMER PRICE INDEX

Thursday, July 14, 8:30 a.m. EDT

Consumer prices for all goods and services are expected to have risen 0.3%. That's the median estimate among economists surveyed by Action Economics. The May consumer price index fell 0.1%, after shooting up 0.5% in April and 0.6% in March. The forecasted June gain would keep the yearly rate of inflation at 2.8% for a second straight month.

Excluding the volatile energy and food categories, consumer prices very likely rose 0.2%. In May, the core consumer price index increased 0.2%, after edging up 0.1% in April. The yearly rate of core inflation for June would hold at 2.2% for a third consecutive period. The core inflation data indicate that inflation remains well contained.

REAL EARNINGS

Thursday, July 14, 8:30 a.m. EDT

Inflation-adjusted weekly earnings of production workers probably slipped 0.1% in June. The Labor Dept.'s employment report showed a 0.2% rise in weekly earnings during the period, while economists expect a 0.3% increase in the June consumer price index. May inflation-adjusted earnings grew 0.3% after easing 0.1%. Compared with the same period a year ago, April inflation-adjusted earnings were off by 0.3%, after a 0.6% yearly decline in April.

EARNINGS REPORTS

Friday, July 15

First Data, General Electric, National City, W.W. Grainger, and more.

PRODUCER PRICE INDEX

Friday, July 15, 8:30 a.m. EDT

Producer prices for finished goods sold by U.S. businesses probably reversed course in June. Economists queried by Action Economics are calling for a 0.4% increase following a 0.6% drop in May. The April index posted a 0.6% increase. Based on the June consensus forecast, producer prices would be 4.0% higher than a year ago, following a yearly pace of 3.5% in May, and 4.8% in April.

Excluding food and energy costs, core prices probably increased by 0.1% in June. In May, core producer prices ticked up 0.1%, following a 0.3% increase in April after a 0.1% rise during March. Based on the Action Economics survey, core producer prices would be up by 2.4% from the same period a year ago, after holding at a yearly pace of 2.6% in the prior three months.

Price pressures further up the production process are currently cooling. Intermediate and crude material prices kept easing in May. Crude materials, the most basic items used to make goods, fell 2%, after a 2.7% jump in April. Less food and energy items, crude goods prices plunged 3.6% in May. Compared with the same month a year ago, prices of crude goods were up just 6.1% after hitting 11.8% in April.

Intermediate goods, which include plywood and fertilizers, fell 0.7% for the month of May and 0.3% when excluding food and energy. The May decline left prices of intermediate goods up just 6.3% from a year ago. The year-ago pace had been running at or above 8% since last August.

EMPIRE STATE MANUFACTURING SURVEY

Friday, July 15, 8:30 a.m. EDT

The New York Federal Reserve Bank issues its latest survey of business conditions for manufacturers in the New York Fed district. The consensus among economists queried by Action Economics is for a June reading of 10. The July forecast would be a small decline from the June level of 11.7, but still far better than the unexpectedly weak reading of -11.1 in May.

The new orders index also bounced back, rising to 8.2 in June, from -8.2 in May, and -1.2 in April. However, the shipments index was still soft in June, coming in at 1, from -0.5 in May. The backlogged orders index also indicated further reductions in unfilled orders, implying less work in the pipeline for manufacturers.

Respondents' expectations for the coming six months were a little lower in June. The latest result continues a slow downward trend in expectations dating back to October, 2004. The future expectations index stood at 34.3 in June, from 36.3 in May, and 37.3 in April. The outlook for new orders and shipments also moderated, while expectations for backlogged orders rose a little.

BUSINESS INVENTORIES

Friday, July 15, 8:30 a.m. EDT

May inventories held by manufacturers, wholesalers, and retailers probably grew 0.4%, says Action Economics. Factory inventories were already reported to have held steady in May. Wholesale inventories grew 0.1% during the same period. Total business inventories increased by 0.3% during April, after a 0.5% rise in March.

Inventory gains were likely smaller than during the first quarter. Factories have put a lid on inventory growth in the second quarter. The June employee discount promotion by General Motors also helped to clear a large amount of inventory from dealerships' lots. The smaller accumulation of inventories by businesses will likely have a negative impact on second-quarter real gross domestic product.

INDUSTRIAL PRODUCTION

Friday, July 15, 9:15 a.m. EDT

U.S. industrial production is expected to have increased 0.4% in June. That's the consensus forecast among economists surveyed by Action Economics. The May report showed a 0.4% gain, following a 0.3% fall in April, and a 0.2% rise in March. The May improvement was driven by a 0.6% jump in manufacturing production. A 0.7% fall in output by utilities weighed on the overall reading. A repeat performance by utilities is unlikely given the hotter weather in June.

Manufacturers may be coming out of their latest soft patch. The Institute for Supply Management's positive June survey of factory activity does provide evidence that the May jump in factory production, following declines in April and March, may not have been a fluke. The June ISM showed improvements in the new orders and production indexes.

At the same time, Commerce Dept. figures on factory orders outside of civilian aircraft have been soft lately. The key areas to watch in the June report are those related to business investment, such as computers and machinery. Businesses have appeared more rattled than consumers by higher oil prices and economic uncertainty.

The average operating rate for all industries probably rose to 79.6%. In May the utilization rate bounced back to 79.4%, after dipping to 79.1% in April.

CONSUMER SENTIMENT INDEX

Friday, July 15, 9:45 a.m. EDT

The University of Michigan's Survey Research Center will report its preliminary reading of consumer sentiment for July. The median estimate from economists polled by Action Economics is for the index to moderate to 95.5. The final June reading showed a considerable improvement in consumer confidence, jumping to 96, from 86.9 in May, and 87.7 in April. The June reading was the strongest of the year.

In June, the current conditions index surged to 113.2, from 104.9 in May. It was the highest reading since November of 2000. Easing gasoline prices and a decent month for U.S. stocks were the likely underlying factors for the improvement. The future expectations index rose to 85, from 75.3 in May. Given the resurgence in oil prices, some erosion from the June levels is to be expected.

MEETING OF NOTE

Sunday, July 17, 9 a.m. EDT

U.S. President George W. Bush hosts India's Prime Minister Manmohan Singh at the White House in Washington, D.C. By James Mehring


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