Vital Signs for the Week of Dec. 12


It promises to be a busy week for the markets, including a Federal Reserve policy meeting on Tuesday and a bevy of economic data throughout the week. In fact, the data are becoming increasingly important to Fed decisions. In the coming months, the strength or weakness of the numbers will be critical in Fed deliberations on when to stop tightening interest rates. In particular, policymakers will be watching the reports closely to gauge the potential for higher energy prices to pass through the economy into other prices.

The coming week will offer lots of grist for the Fed's mill. November retail sales on Tuesday will be a key pre-holiday indicator of consumers' willingness to spend, which has been in surprising evidence lately, even in the face of the hurricane-related run-up in energy prices. However, with energy quotes down from their highs, and with gasoline prices down to their lowest level since mid-June, households' confidence has rebounded, and consumers' incomes now stretch farther. The week will also yield new evidence on foreign demand, as part of the October report on the trade deficit, due on Wednesday.

There will also be plenty of news on the production side of the economy. One indicator to watch for signs of strength in fourth-quarter gross domestic product (GDP) growth will be October inventories. The inventories became overly skimpy in the second and third quarters, reflecting the combination of business caution over energy and surprisingly resilient demand. Stock-building is expected to add strongly to fourth quarter GDP growth.

Other indications on output: The Fed will report on November industrial production on Thursday, which has picked up strongly in recent months, led by tech-equipment producers. And on the same day regional industry surveys from the New York and Philadelphia Federal Reserve Banks will offer addition data on December activity in those regions.

Perhaps the week's most important, and potentially market-moving, report will be the November consumer price index. While the overall index is expected to drop, reflecting the recent decline in energy prices, the markets and the Fed will have a keen eye on the core index, which excludes energy and food. Economists expect the core CPI to rise 0.2% from October, but a deviation of even a tenth from that expectation could heighten the day's volatility.

Here is the week's full lineup:

MEETINGS OF NOTE

Monday, Dec. 12, 12 p.m. EST

The Organization of Petroleum Exporting Countries meets to determine production levels for the first quarter of 2006.

12 p.m. EST

The Bond Market Association releases its yearend economic forecast in Washington, D.C.

FEDERAL BUDGET

Monday, Dec. 12, 8:30 a.m. EST

The federal government is forecast to have racked up a monthly budget deficit of $78 billion during November. That's the consensus estimate among economists polled by Action Economics. Fiscal year 2006 began with a $47.2 billion shortfall in October, after a total budget gap for fiscal year 2005 of $318.5 billion, down considerably from the fiscal year 2004 total of $412.8 billion.

Increased economic activity and the end of the accelerated depreciation bonus tax break for corporations led to a 14.6% increase in federal revenues during fiscal year 2005. Economic growth is expected to remain steady in 2006. However, the fiscal year 2006 budget deficit will probably widen as revenue growth is unlikely match the pace of 2005 and outlays to help the Gulf Coast region rebuild after this year's hurricanes will increase total outlays.

MEETINGS OF NOTE

Tuesday, Dec. 13

The Federal Reserve's Federal Open Market Committee meets to discuss monetary policy. An announcement by the Fed will come at 2:15 p.m. Every economist surveyed by Action Economics expects a 25 basis point hike in the federal funds rate, to 4.25%. Economists are also unanimous in their belief that the central bank will raise rates at the Jan. 31 meeting, the final FOMC gathering of Chairman Alan Greenspan's term.

10 a.m. EST

The Institute for Supply Management issues its semiannual economic forecast at a press conference in Atlanta.

EARNINGS REPORTS

Tuesday, Dec. 13

ADC, Best Buy, and more.

ICSC-UBS STORE SALES

Tuesday, Dec. 13, 7:45 a.m. EST

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 Dec. 10. Sales were down a sharp 3.1% for the week ended Dec. 3, after a 0.7% drop for the week ended Nov. 26.

RETAIL SALES

Tuesday, Dec. 13, 8:30 a.m. EST

Retail sales probably grew at moderate clip in November. The median estimate of economists polled by Action Economics is for a 0.4% gain. October sales eased 0.1% due in large part to American auto makers reining in generous incentive programs. Auto sales plunged 3.6% during the period. For November, the seasonally adjusted annual rate of auto sales was 15.7 million.

Outside of autos, October retail sales climbed 0.9% even as lower gasoline prices caused purchases at gasoline stations to fall 0.8%. Elsewhere, home furnishing, electronics, and building material sales kept growing, and clothing sales heated up with a 3.1% increase.

Excluding autos, November retail sales probably posted a 0.1% gain. November chain store sales were up 3.5% from a year ago, a positive sign for the Census Dept.'s ex-auto sales figures. Gas station sales could decline again as unleaded gasoline prices continued to drop during November.

BUSINESS INVENTORIES

Tuesday, Dec. 13, 8:30 a.m. EST

Inventory growth among manufacturers, wholesalers, and retailers probably slowed in October. The consensus estimate from Action Economics is a 0.4% increase, after a 0.5% gain in September, and a 0.4% rise in August. There may be some upside risk to the forecast since manufactured goods inventory levels were already reported to have risen 0.6% for October. Factory inventories make up about 36% of overall business inventories.

In the past two quarters, businesses have trimmed inventory levels as uncertainty regarding growth and energy prices mounted. Now that the economy is expected to expand at a healthy clip in the coming quarters, companies should stop drawing down on inventories.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, Dec. 13, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the second fiscal week of December, ended Dec. 10. In the first week of December, ended Dec. 3, sales were off 0.3% from the same period in November. Sales during November ended up 0.3% better than the month of October.

MEETING OF NOTE

Wednesday, Dec. 14, 11 a.m. EST

The Business Roundtable releases its quarterly CEO Economic Outlook survey.

MORTGAGE APPLICATIONS

Wednesday, Dec. 14, 7 a.m. EST

The Mortgage Bankers Association releases its numbers on mortgage applications for both home buying and refinancing for the week ending Dec. 9. The purchase index bounced up to 495.1 in the week ended Dec. 2, from 476.2 in the week ended Nov. 25, and 472.3 in the week ended Nov. 18. The four-week moving average subsequently moved up to 480.4, from 473.0 during the week ended Nov. 25.

The average rate on a conventional 30-year fixed mortgage eased, according to HSH Associates. For the week ended Dec. 2, the rate was 6.37%, down from 6.41% in the week ended Nov. 25. The recent declines may be inducing some prospective buyers to jump, especially if they believe rates will once again head north.

The MBA's refi index also experienced a bounce back. During the week ended Dec. 2, the refi index hit 1596.4, from 1484.3 in the week ended Nov. 25, and 1584.1 in the prior week. The four-week moving average, however, continued to tumble, coming in at 1591.8, from 1642.4 for the week ended Nov. 25.

INTERNATIONAL TRADE

Wednesday, Dec. 14, 8:30 a.m. EST

The monthly U.S. trade deficit of goods and services most likely narrowed in October. The consensus among economists queried by Action Economics is for a $63 billion deficit. The September deficit was $66.1 billion as imports swelled and exports slipped. Increased energy imports and port disruptions caused by Hurricane Katrina contributed to the record deficit in September. The August trade gap stood at $59.3 billion.

The October level of exports is expected to rebound slightly. The Institute for Supply Management's factory and non-manufacturing indexes tracking export orders continue to imply rising demand from abroad. Imports are forecast to cool slightly. Any easing largely depends on how much crude oil and other petroleum products the U.S. had to import in order to compensate for capacity still offline from the hurricanes.

IMPORT AND EXPORT PRICES

Wednesday, Dec. 14, 8:30 a.m. EST

Import prices probably declined in November. The median forecast from Action Economics calls for a 0.8% decline. Import prices declined 0.3% during October, following a 2.3% energy-induced surge in September, and three straight monthly gains above 1% from June to August. Excluding petroleum, import prices rose 0.8%, after a 1% increase in September, fueled by a 19.6% jump in imported natural gas prices.

Overall, import prices were up 8.1% from a year ago in October, from 10.2% in September. Excluding oil, import prices were up 3.7% from a year ago vs. a pace of 2.8% in September. Besides the retreat in oil prices during November, a strengthening dollar during the course of 2005 is helping to curb import prices.

November export prices most likely held steady, after October export prices grew 0.6%, following a 0.8% gain in September. Prices of agricultural exports are rebounding. Compared to the same month a year ago, prices of agricultural commodity exports increased 4.8%. From October of 2004 through July of 2005, prices measured on a year ago basis were declining.

EARNINGS REPORTS

Thursday, Dec. 15

Adobe Systems, Apollo Group, Bear Stearns, Goldman Sachs, KB Home, Lennar Corporation, Oracle, and more.

JOBLESS CLAIMS

Thursday, Dec. 15, 8:30 a.m. EST

First-time claims for jobless benefits for the week ended Dec. 3 are forecast to dip to a rate of 320,000. That's the consensus among economists surveyed by Action Economics. Jobless claims eased to 320,000, from an upwardly revised 337,000 in the previous period and 305,000 for the week of Nov. 12.

The four-week moving average also edged down to 322,500, from 323,750 for the week ended Nov. 19, but remained just above the 322,000 for the four week period through the week ended Nov. 12. Continuing jobless claims for the week ended Nov. 19 was 2.77 million, from an upwardly adjusted 2.79 million in the week ended Nov. 12.

CONSUMER PRICE INDEX

Thursday, Dec. 15, 8:30 a.m. EST

Consumer prices for all goods and services most likely edged lower in November The consensus estimate among economists queried by Action Economics is a dip of 0.4%, following a 0.2% rise in October, and a 1.2 jump in September. The more subdued October rise resulted from a 4.4% monthly fall in motor fuel prices and lower prices for non-food nondurable goods, such as clothing.

Compared with a year ago, consumer prices in October were up 4.3%, after a 4.7% rate in September, the biggest gain since June of 1991. Barring another spike in energy prices during the winter, the headline level of inflation should ease further.

Excluding energy and food, consumer prices probably increased 0.2% for a second straight month. Core consumer prices ticked up 0.1% each month from May through September. The yearly rate of core inflation held at 2% in for a second straight period, from 2.2% in August.

EMPIRE STATE MANUFACTURING SURVEY

Thursday, Dec. 15, 8:30 a.m. EST

The New York Federal Reserve Bank releases the December survey of business conditions for manufacturers in the New York Fed district. The median forecast of economists surveyed by Action Economics is for a reading of 19.4. The November reading was 22.8, up from the October level of 12.1 and 15.6 in September.

More respondents reported increases in new orders, unfilled orders, and shipments. The increased demand led the November inventories index to ease, inferring a slower pace of inventory growth, and while index tracking number of employees surged to 16.0, from 9.3 in October. The improving picture may be providing an opening for some manufacturers to offset higher energy and material costs. The number of respondents who said prices increased rose by three percentage points, while the level who said they raised the prices of their products increased 6 percentage points.

The region's manufacturers showed more optimism about the near future. The index tracking manufacturers' expectations for the coming six months climbed to 46.9 in November, from 32.6 a month earlier.

REAL EARNINGS

Thursday, Dec. 15, 8:30 a.m. EST

Inflation-adjusted weekly earnings of production workers probably rose 0.3% during November. The Labor Dept.'s employment report showed a 0.1% retreat in weekly earnings, while economists expect a 0.4% dip in the November consumer price index. Real earnings rebounded 0.4% in October, after a 1% fall in September. Compared with the same period a year ago, inflation-adjusted earnings were down 1.6% in October. Real wages were off 2.3% from a year ago in September.

INDUSTRIAL PRODUCTION

Thursday, Dec. 15, 9:15 a.m. EST

U.S. industrial production kept expanding in November. According to the median forecast of economists queried by Action Economics, industrial output rose 0.5%. In October, industrial production climbed out of its recent funk with a 0.9% increase. September industrial output, affected by Hurricanes Katrina and Rita, fell 1.5%, after a 0.2% rise in August and no change in July.

The strength in production is emanating from manufacturing. Factory production grew 1.4% in October, while the mining and utility sectors showed further contractions. September manufacturing output was also skewed by a machinist strike at Boeing. Output of transit equipment surged of 36.8% in October, after a 25.5% plunge in September.

However, factory activity looked positive in other areas. Output of fabricated metals and computer equipment, and electrical equipment kept growing. Production of nondurable goods rose for the first time in three months. Softer auto sales did cause vehicle output to decline in October.

The average operating rate for all industries is expected to be 79.8%, from 79.5% in October and 78.9% in September. Based on other manufacturing data, demand looks healthy. The positive conditions should push the utilization rate back to pre-hurricane levels above 80%.

PHILADELPHIA FED SURVEY

Thursday, Dec. 15, 12 p.m. EST

The Philadelphia Federal Reserve Bank releases its December manufacturing activity index for the mid-Atlantic region. The consensus estimate among economists queried by Action Economics is an index reading of 14. The November index slipped 11.5, after rebounding to 17.3 in October, from 2.2 in September.

More manufacturers said shipments rose in the November survey, but the data also showed a slowdown in the pace of new order growth, and a decline in the level of unfilled orders. Nonetheless, there was a small uptick in the index for number of employees, rising to 19.1, from 17 in October, and 2.7 in September.

Even though demand appeared to soften a little in November, manufacturers expressed an increased level of optimism for the coming six months. The overall future expectations index rose to 29.2, from 22 in October. More respondents in the region think shipments, new orders and unfilled orders will grow during the period.

CURRENT ACCOUNT

Friday, Dec. 16, 8:30 a.m. EST

The current account deficit -- a kind of cash flow statement of U.S. international business, including trade in goods and services, net investment income, and foreign transfers -- is expected to have widened to $205 billion in the third quarter of the year. That's the consensus estimate from Action Economics. In the second quarter, the current account deficit was $195.7 billion, down from $198.7 billion in the first quarter of 2005. The consensus forecast of a $205 billion deficit would end up being 6.5% of nominal gross domestic product.

Besides the wider trade gap, the difference between investment income earned by Americans from abroad and foreign investor returns on assets in the U.S. will likely be negative. This balance on investment income showed a $455 million deficit in the second quarter, the fifth quarter on record that net investment income was negative. However, the net income outflow could persist if the Federal Reserve raises short-term interest rates at a faster clip than other central banks and the U.S. budget deficit grows this fiscal year. Those trends would result in larger interest payments to foreigners on a bigger stock of debt. By Jim Cooper


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