Vital Signs for the Week of Aug. 15


Inflation is rising, but the pickup is still narrowly based. Energy and some areas of services are where prices are rising the fastest. That trend will likely continue in the latest batch of inflation numbers due out this week.

The July consumer and producer price indexes are expected to show strong gains due to higher energy prices. A barrel of crude oil jumped 5% in July and a BTU of natural gas surged 10.7%. Take out energy and food, and the inflation numbers should look fairly benign.

The other area where inflation is rising at a quicker pace is in the service sector. Many service companies have a greater ability to pass along those costs, since most do not face much international competition. What's more, fields such as education and medicine are also seen as essential by consumers and have limited substitutes. Therefore, consumers are not as price sensitive.

Manufacturers have a tougher time raising prices. The latest import price index figures for July show why. Strip out energy, and import prices fell for a third straight month. Some of the recent declines are likely linked to the rise in the U.S. dollar, which makes foreign goods less costly in dollar terms.

However, resilient consumer spending and resurgent business outlays probably left factories busier. The consensus estimate is for a 0.4% rise in output and a capacity utilization rate of 80.2%. A year ago, the utilization rate was at 77.8%. Even after a spring soft patch, the capacity utilization rate could go beyond the long-run average of 81% before yearend.

If the second-half turns out as strong as economists are beginning to think, manufacturers could approach levels of operation within a year that often produce bottlenecks and provide a little more room to raise prices. Traditionally, stronger pricing power emerges around a utilization rate near 83%.

Of course, such an outcome depends on the economy maintaining its healthy pace of growth. However, economy watchers are keeping a close eye on oil, which hovered near a record $67 per barrel on Aug. 12. If production and refinery problems continue to pop up, surging energy prices have the potential to cool down the economy.

Here's the weekly economic calendar.

EARNINGS REPORTS

Monday, Aug. 15

Agilent Technologies, Lowe's Companies, SYSCO Corp., and more.

EMPIRE STATE MANUFACTURING SURVEY

Monday, Aug. 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 small moderation in the August index, to 19. The July reading shot up to its highest level of the year at 23.9, from 10.5 in June, and -11.1 in May.

The other indexes also reflected a sharp turnaround in activity. The new orders index surged to 19.2, from 8.1 in June. The shipments reading reached 20.9, after edging up to 1 in June. More demand caused manufacturers to ramp up production and draw down inventories. The inventories index tumbled to -9.8, from 4 in June. There were also enough orders to push the unfilled orders index into positive territory for the first time since January.

Respondents' expectations for the coming six months were also improved. The overall expectations index jumped to 47, from 34. The July reading was the strongest since last November.

New order and shipments are also expected to improve, with some small increase in backlogged orders during the upcoming six months. The bottom line is that manufacturers in the New York Fed region see a brighter second half after a spring slump.

HOME BUILDERS SURVEY

Monday, Aug. 15, 1 p.m. EDT

The National Assn. of Home Builders and Wells Fargo bank issue the 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 activity index eased to 70, from an upwardly revised level of 72 for June. The May index stood at 70, following an April reading of 67.

The index tracking single-family home sales edged down to 75, from 77 in June. Expectations for sales in the coming six months slipped to 77, from 80 in June. The index for prospective buyer traffic held at 55. The NAHB reported that builders in the West are the most positive, while Midwestern builders are not seeing the same strength as in the rest of the country.

EARNINGS REPORTS

Tuesday, Aug. 16

Applied Materials, Deere & Co., Hewlett-Packard, Home Depot, JC Penney, Nordstrom, Staples, TJX Companies, Wal-Mart Stores, and more.

ICSC-UBS STORE SALES

Tuesday, Aug. 16, 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 period ending Aug. 13. During the week ended Aug. 6, sales slipped 0.8%, after five straight weekly gains.

CONSUMER PRICE INDEX

Tuesday, Aug. 16, 8:30 a.m. EDT

Consumer prices for all goods and services are expected to have risen 0.4% in July. That's the median estimate among economists surveyed by Action Economics. The June consumer price index was unchanged, after a 0.1% slip in May, a jump of 0.5% in April, and a gain of 0.6% in March. The June index was up 2.5% from the same month a year ago. The yearly pace has cooled down some. The May index was up 2.8% from a year ago, while April prices were up 3.5%.

Excluding the volatile energy and food categories, consumer prices very likely rose 0.2%. In June, the core consumer price index increased 0.1% for a second straight month, after holding steady in April. The yearly rate of core inflation for June was 2.0%, after coming in at 2.2% in both May and April.

NEW RESIDENTIAL CONSTRUCTION

Tuesday, Aug. 16, 8:30 a.m. EDT

The pace of housing starts probably picked up a little in July. The annual rate for the month is expected to be 2 million, according to the consensus forecast of economists polled by Action Economics. Housing starts were unchanged at a pace of 2 million in June, after easing to a rate of 2 million in May, from 2.3 million in April.

There are some indications that long-term interest rates and mortgage rates are adjusting to prospects of further rate hikes by the Federal Reserve and potential inflationary pressures. If mortgage rates -- now at 6% for a 30-year conventional mortgage, according to HSH Associates -- continue to edge higher, then risks of a slowdown in the housing market will rise.

REAL EARNINGS

Tuesday, Aug. 16, 8:30 a.m. EDT

Inflation-adjusted weekly earnings of production workers probably held steady during July. The Labor Dept.'s employment report showed a 0.4% rise in weekly earnings during the period, while economists expect a 0.4% increase in the July consumer price index.

In June, real earnings rose 0.2%, after remaining unchanged in May, and declining in the previous three months. Compared with the same period a year ago, June inflation-adjusted earnings were up 0.4%. Real wages were down 0.6% from a year ago in May.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, Aug. 16, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the second fiscal week of August, ended Aug. 13. During the first fiscal week of the month, sales were off 0.8% compared with the same period in July. For the entire month of July, sales were up 0.3%, after posting an increase of 0.5% in June.

INDUSTRIAL PRODUCTION

Tuesday, Aug. 16, 9:15 a.m. EDT

U.S. industrial production is expected to have increased 0.4% in July. That's the median estimate from economists queried by Action Economics. In June, output jumped 0.9%, largely in the back of a 5.3% surge in utility output caused by hot weather. Factories produced 0.4% more in June, after a 0.5% gain in May. A big increase in output by utilities during July is very real given the hot weather during the month.

The July data will be an early signal as to how strong the second half will be for manufacturers. Factory activity surveys have, in general, indicated improving conditions. The Institute for Supply Management's July survey of factory activity posted a second straight monthly gain. Index components, such as new orders, and unfilled orders also improved. The Fed's industrial output data was a little lopsided as auto vehicle and parts output jumped 2.9% in June.

The key to the July numbers will be broad-based gains. Such a pattern would imply improved business spending across a wide swath of the economy.

The average operating rate for all industries probably rose to 80.2%. In June the utilization rate climbed to 80%, the highest reading since December of 2000.

EARNINGS REPORTS

Wednesday, Aug. 17

Medtronic, Network Appliance, and more.

MORTGAGE APPLICATIONS

Wednesday, Aug. 17, 7 a.m. EDT

The Mortgage Bankers Assn. releases its numbers on mortgage applications for both home buying and refinancing for the week ending Aug. 12. The purchase index increased to 498.8 during the week ended Aug. 5, after rising to 494.5 over the week ended July 29, from 485.1 in the previous week. The four-week moving average did post an increase, to 491.8, from 489.3 for the week ended July 29.

The average rate on a conventional 30-year fixed mortgage, according to HSH Associates, hit 6% during the week ended Aug. 5. For the week ended July 29, the mortgage rate stood at 5.92%.

The MBA's refi index fell for a third straight week. In the period ended Aug. 5, the index came in at 2176.5, from 2250.3 in the week ended July 29, 2320.3 in the week ended July 22, and 2618.2 during the week ended July 15. The four-week moving average also fell. In the week ended Aug. 6, the average stood at 2341.3, from 2435.8 for the period ended July 29.

PRODUCER PRICE INDEX

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

Producer prices for finished goods sold by U.S. businesses probably posted a sizeable, energy-driven increase in July. Economists polled by Action Economics forecast a 0.5% increase for July. In June, the producer price index was unchanged, after a 0.6% drop in May, and a 0.6% jump in April. Producer prices were up 3.6% from a year ago in June, from 3.5% in May, and 4.8% in April.

Excluding food and energy costs, core prices probably increased by 0.1% in July. In June, core producer prices edged down 0.1%, after a 0.1% gain in the prior month, and a 0.3% increase in April. Compared with the same month a year ago, the June core price index was up 2.2%, vs. 2.6% in each of the three previous months.

EARNINGS REPORTS

Thursday, Aug. 18

Autodesk, Gap, JDS Uniphase, Limited Brands, and more.

JOBLESS CLAIMS

Thursday, Aug. 18, 8:30 a.m. EDT

First-time claims for jobless benefits for the week ended Aug. 13 probably moved back up to 315,000. Jobless claims came in at 308,000 for the week ended Aug. 6, and stood at 314,000 for the week ended July 30. The recent claims data point to slightly stronger labor market conditions. The last time readings were running this low was back in February. The Labor Dept. reported a 300,000 increase in February payrolls.

The four-week moving average dropped to 309,300, from 316,500 for the period ended July 30. Continuing jobless claims for the week ended July 30 slipped back to 2.57 million, from 2.58 million in the previous week.

LEADING INDICATORS

Thursday, Aug. 18, 10 a.m. EDT

The Conference Board's composite index of leading economic indicators is expected to have risen 0.2% during July. That's the consensus forecast from Action Economics. The June index jumped 0.9%, after holding steady in May, and growing 0.2% in April. The June leading index was up 2.4% compared with the same period a year ago.

The June index also contained some changes to the leading index, as well as revisions to historical data which made recent data more positive. The biggest change was a change how the spread between the 10-year Treasury bond and the Fed funds rate effects the leading indicators index.

Now, the only way that the yield curve will have a negative impact on the index is if it inverts. In other words, if the Fed funds rate is higher than the 10-year Treasury rate. A narrowing of the spread, which has been the trend lately, no longer makes a negative contribution. A smaller positive gap between the long-term and short-term rate just means a smaller positive contribution. The alteration means a big upward change in recent index readings. Rather than a decline during the six-month period ended in May, the revised headline index showed a 1.2% annualized gain in the six-month period through June.

PHILADELPHIA FED SURVEY

Thursday, Aug. 18, 12 p.m. EDT

The Philadelphia Federal Reserve Bank will issue its August survey of business conditions for the mid-Atlantic region. The median forecast of economists polled by Action Economics is for an index reading of 12. The July Philly Fed index rebounded to 9.6, after sinking to -2.2, from 7.3 in May. However, respondents were less optimistic about the following six months. The future expectations index was 15.3, from 30.6 in June and 22.3 in May. The July reading was the lowest since February of 2001.

The current conditions index for shipments, new orders, and unfilled orders all rebounded in July. The unfilled orders index moved up to -9.2, after tumbling to -19 in June, from -0.1 in May and -3.8 in April. The unfilled orders index has been below zero since December. A negative reading implies that companies were completing more orders than they were receiving.

The outlook by respondents in the Philly Fed area contrasts a bit with those in the neighboring New York Fed area and in national factory activity figures. The latest factory data have been pointing to an upswing in production and demand for at least the third quarter of the year. By James Mehring


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