Markets & Finance

Vital Signs: Business Confidence Turns Sour


On tap: September industrial production and consumer prices, October regional factory activity reports, Federal Reserve's Beige Book

Businesses have gotten more cautious in response to tighter credit market conditions and heightened economic uncertainty. A Conference Board survey of CEOs showed confidence at a multi-year low. One apparent upshot is a pullback in corporate spending and slower times for many U.S. manufacturers.

Economists will be looking at the Federal Reserve's September factory output data to see how seriously manufacturers are affected by the increased concern among companies. In August, factory output fell, but the weakness was generally isolated to motor vehicles and housing related areas. Vehicle production plunged 2.6%, while machinery, wood products, furniture, and appliance output also fell. One category of particular interest in the upcoming report will be tech equipment. This is an important component of capital investment and it has held up well so far.

A couple of regional Federal Reserve Banks will also put out their October factory activity surveys. However, the September New York and Philly Fed reports moved in opposite directions, providing little confirmation of conditions on a national level.

On top of the factory-related numbers, the Federal Reserve will also issue its Beige Book report covering economic conditions across the country. This report will get a lot of scrutiny by Wall Street as it tries to judge the likelihood of another rate cut at the Oct. 31 monetary policy meeting.

If factory activity and Beige Book results reflect further slowing in the economy, it will ease inflation concerns even if the September numbers on consumer prices due Oct. 17 show signs of renewed price pressures. Economists expect a rebound in September after the CPI eased 0.1% in August. And the yearly pace could very well jump from the August pace of 2%. Last September, a big drop in energy prices pulled the index down 0.5%, but a similar decline is unlikely this year which would result in a gain in the annual pace of inflation.

Here's the weekly economic calendar, from Action Economics.

Economic Reports

Report

Date

Time

For

Median Estimate

Last Period

Empire State Index

Monday, Oct. 15

8:30 a.m.

October

14.0

14.7

Industrial Production

Tuesday, Oct. 16

9:15 a.m.

September

0.1%

0.2%

Capacity Utilization

Tuesday, Oct. 16

9:15 a.m.

September

82.1%

82.2%

CPI

Wednesday, Oct. 17

8:30 a.m.

September

0.3%

-0.1%

CPI (ex-food & energy)

Wednesday, Oct. 17

8:30 a.m.

September

0.2%

0.2%

Housing Starts (million, annual rate)

Wednesday, Oct. 17

8:30 a.m.

September

1.30

1.33

Leading Indicators

Thursday, Oct. 18

10:00 a.m.

September

0.2%

-0.6%

Philadelphia Fed Survey

Thursday, Oct. 18

12:00 p.m.

October

9.0

10.9

MEETING OF NOTE

Monday, Oct. 15, 7 p.m. EDT - Federal Reserve Board Chairman Ben Bernanke speaks at a dinner held by the New York Economic Club in New York City.

EMPIRE STATE MANUFACTURING SURVEY - Monday, Oct. 15, 8:30 a.m. EDT

The New York Federal Reserve Bank's October Empire State Manufacturing Survey probably slipped a little further. In September, the general business conditions index fell to 14.7, from 25.1 in August, and 26.5 in July. The long run average is 15. There were drops in the new orders and shipments indexes, while the unfilled orders reading turned negative, and the reading of employment jumped to 18.2 from 11.6.

Expectations for the coming six months were still relatively positive in September with a reading of 48.8, from 50.4 the month before, and 48.2 in July. The view on new orders, shipments and hiring brightened. However, plans for capital spending did deteriorate.

MEETING OF NOTE

Tuesday, Oct. 16, 8:45 a.m. EDT - Former Federal Reserve Board Chairman Alan Greenspan speaks at the Epicor Perspectives 2007 software conference.

ICSC-UBS STORE SALES - Tuesday, Oct. 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 week ended Oct. 13. Sales held steady for a second straight week after falling 1% in the week of Sept. 22 and 1.1% in the period ended Sept. 15. The yearly pace of growth dropped to 2.1%, from 2.7% in the week ended Sept. 29.

JOHNSON REDBOOK INDEX - Tuesday, Oct. 16, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the first week of October, ending Oct. 13. For the month of September sales were up 0.3% from August. Sales for the entire month of August through Sept. 1 were down 0.5%.

INDUSTRIAL PRODUCTION - Tuesday, Oct. 16, 9:15 a.m. EDT

September industrial activity probably moderated. In August, total production rose 0.2% due solely to a 5.3% jump in utility output. Manufacturing fell 0.3% on big declines in vehicle and machinery production. The key business equipment category, a good indicator of business investment spending, also edged lower in August. Some consumer and housing related areas such as appliances and home electronics have softened in recent months as well. One bright spot was an upward revision to July industrial production growth to 0.5%, from 0.3%. A key issue for manufacturers going forward will be how much foreign demand will help offset any weakness at home.

The small gain forecast for September isn't expected to keep the capacity utilization rate from edging lower. The August rate was 82.2% for a second straight period, slightly lower than the 82.4% level from a year ago.

HOME BUILDERS SURVEY - Tuesday, Oct. 16, 1:00 p.m. EDT

The National Association of Home Builders and Wells Fargo bank will issue the October Housing Market Index. The index measures housing market conditions by surveying builders' on current sales, buyer traffic through model homes, and expectations for sales during the next six months. Builders look depressed, with the September reading equaling a record low of 20 set in January, 1991. The report goes back to 1985.

The index tracking current single-family homes also sank to 20, the second lowest reading on record, from 22 in August. Expectations for the coming six months hit an all-time low of 26, after falling to 31 in the prior month. Earlier this year builders expressed a belief that the housing market would improve this year, but that has not come to fruition. Besides fewer sales, respondents are seeing fewer people visit model homes as well.

MEETING OF NOTE

Wednesday, Oct. 17, 5:30 p.m. EDT - Federal Reserve Bank of New York Executive Vice President and Manager of the System Open Market Account William Dudley will give a speech entitled "May You Live in Interesting Times" at a Philadelphia Federal Reserve Bank conference in Philadelphia.

8:45 p.m. EDT - Federal Reserve Bank of Kansas City President Thomas Hoenig speaks about monetary policy and the economy in Tulsa, Okla.

MORTGAGE APPLICATIONS - Wednesday, Oct. 17, 7 a.m. EDT

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity. They rebounded for the week ending Oct. 5, after both fell in the previous week. The purchase index was 420.2, up from 411.4 in the prior period. The refi measure was 2003.2 in the week ended Oct. 5, from 1950.4.

The four-week moving average for the purchase index eased down to 425.6, from 432.6 in the latest period. The refi index climbed to 1985.5, after rising to 1953.9. The average interest rate for a 30-year fixed-rate mortgage bounced back to 6.4%, after slipping to 6.33%.

CONSUMER PRICE INDEX - Wednesday, Oct. 17, 8:30 a.m. EDT

Inflation probably ticked up in September after slipping in August. The overall price index was pulled down 0.1% by a 4.9% tumble in gasoline prices and natural gas dropped 1.3%. Gasoline prices crept up a little during the month of September. There are also signs that the weaker housing market is reducing price pressures for renters and home owners.

On a yearly basis, inflation slipped to 2% from 2.4% in July and 2.7% in June. However, the yearly pace could pick back up since prices fell during this time in 2006.

Prices outside of food and energy probably grew at a modest pace. Core inflation climbed 0.2% for a second straight month in August. Medical and education costs continue to run at an accelerated pace -- up 5.6% and 5.1%, respectively at an annualized rate in the past three months.

On a yearly basis, core inflation grew 2.1% in August, from 2.2% in July and 2.7% back in February.

NEW RESIDENTIAL CONSTRUCTION - Wednesday, Oct. 17, 8:30 a.m. EDT

Housing starts are expected to keep falling in September. The annual pace of starts took another leg lower, to an annual rate of 1.33 million in August, from 1.37 million in July. The latest level was the smallest since mid-1995. From a year ago, starts are off 19.1% from 21.7% in July.

Although the pace of decline in starts is letting up, housing authorizations continue to fall at a rapid pace. Authorizations, which are a precursor to starts, fell to an annual rate of 1.31 million, from 1.39 million in July. The annual decline was 24.5% in August, a pickup from the 21.7% drop in July. The quicker pace of decline in authorizations may be a harbinger of larger drops in starts going forward.

REAL EARNINGS - Wednesday, Oct. 17, 8:30 a.m. EDT

Inflation-adjusted weekly earnings of production workers probably improved. That's based on the consensus forecast of a 0.2% gain in the September consumer price index and a healthy 0.4% gain in average weekly earnings for the same month. Real earnings rebounded with a 0.5% gain in August, after monthly decline of 0.1% in July. Compared to the same period a year ago, inflation-adjusted earnings accelerated to a 2.1% pace in August, from 1.3% in July.

BEIGE BOOK - Wednesday, Oct. 17, 2 p.m. EDT

The Federal Reserve will release its compilation of regional economic activity, based on survey responses from each of its 12 districts. The Beige Book will come ahead of the monetary policy meeting on Oct. 31. Economists surveyed by Action Economics are split over the question of whether the Fed will cut interest rates further or stand pat at the October meeting. However, there's still a widespread belief that the target rate will be lower than its current 4.75% before yearend.

At the Sept. 18 monetary policy meeting, Fed officials trimmed their forecast for economic growth and inflation. There is concern that ongoing issues in the credit markets and a crumbling housing market could further dampen consumer and business spending. The latest Beige Book report will provide some real-time anecdotal data on economic conditions.

MEETING OF NOTE

Thursday, Oct. 18, 10:30 a.m. EDT - Federal Reserve Bank of Cleveland President Sandra Pianalto speaks as part of the Ohio Grantmakers Forum Annual Conference titled "New World, New Philanthropy" in Columbus, Ohio.

12 p.m. EDT - Federal Reserve Bank of Philadelphia President Charles Plosser will discuss a paper entitled "Economic Projections and Rules-of-Thumb for Monetary Policy" by Athanasios Orphanides, governor of the Central Bank of Cyprus and Volker Wieland of Goeth University-Frankfurt in St. Louis, Mo.

JOBLESS CLAIMS - Thursday, Oct. 18, 8:30 a.m. EDT

Jobless claims fell to 308,000 in the week ended Oct. 6. In the prior period, initial claims bounced up to 320,000, from 300,000 for the week ended Sept. 22. The four-week moving average drifted up to 310,250, from 313,250 for the week ended Sept. 29. Continuing jobless claims, which run a week behind the initial claims figures, drifted down to 2.52 million, from 2.54 million in the week ended Sept. 22. Overall, the jobless claims figures in September did not point to further deterioration in the labor market.

LEADING INDICATORS - Thursday, Oct. 18, 10 a.m. EDT

The Conference Board's composite index of leading economic indicators is expected to recoup some lost ground in September. The August index slumped 0.6%, after a 0.7% gain in July. On a yearly basis the index is still climbing, but the pace if very weak. In August it was up 0.6% from a year ago, from 0.9% in July.

The August drop was pretty broad based with eight of the ten indicators pulling down the index. Deterioration in consumer expectations, higher initial jobless claims, a downturn in stock prices, and ongoing weakness in housing construction had the biggest negative impacts. Since then, stock prices have improved, initial claims have trended lower, and consumers expressed a little less pessimism about the future.

PHILADELPHIA FED SURVEY - Thursday, Oct. 18, 12 p.m. EDT

The Philadelphia Federal Reserve Bank's October factory activity index for the mid-Atlantic region probably edged down after popping up to 10.9 in September, from zero in August. The second quarter average was 6.7, which was off from 7.5 in the second quarter, indicating a slowdown in growth.

Among the components, it looks as if plants were busier and demand picked up. The shipments index rose to 16.9, from 12.4 in August. The new orders reading of 15.1 was more than double the August level. However, the level of unfilled orders looked as if it shrank some more with a -1 September result. Hiring also slowed down considerably after an August reading of 21.2, a three-year high.

The region's manufacturers were still fairly optimistic about the coming six months. The general business activity index was 35.7 in the most recent period, from 36.2 in August. There are higher expectations for shipments, new orders and unfilled orders. More respondents in the Philly Fed area are scaling back their investment plans, echoing manufacturers in the New York Fed region.

MEETING OF NOTE

Friday, Oct. 19, 10 a.m. EDT - Federal Reserve Board Chairman Ben Bernanke and Federal Reserve Bank of Philadelphia President Charles Plosser take part in a panel discussion at the St. Louis Fed's conference titled "Monetary Policy Under Uncertainty" in St. Louis.

Earnings Calendar

Day

Companies

Monday

Citigroup, Eaton, Mattel, W.W. Grainger

Tuesday

CSX, IMS Health, Intel, Johnson&Johnson, KeyCorp, Linear, Regions Financial, State Street, SuperValum U.S. Bancorp, Well Fargo, Yahoo

Wednesday

Abbott Labs, Altria, CIT Group, Citrix Systems, Comerica, E*Trade Financial, eBay, Gannett, Illinois Tool Works, J.P. Morgan Chase, Leggett & Platt, Marshall & Ilsley, MGIC Investment, Noble Construction, Northern Trust, Sovereign Bancorp, Stryker, Allstate, Coca-Cola, Torchmark, United Technologies, Washington Mutual

Thursday

American Standard, Bank of America, Bank of New York Mellon, Baxter International, BB&T, Capital One Financial, Danaher, Dow Jones & Co., Eli Lilly, First Horizon, National, Genuine Parts, Google, Huntington Bancshares, McGraw-Hill, Molex, Nucor, Parker Hannifin, Pfizer, PNC Financial Services Group, PPG Industries, Robert Half International, SanDisk, Southwest Airlines, St. Jude Medical, SunTrust, Textron, Hershey, Union Pacific, UnitedHealth Group, VF, Wyeth, Xilinx, Zions Bancorp

Friday

3M, Boston Scientific, Caterpillar, Fifth Third Bancorp, Harley Davidson, Honeywell, Schlumberger, Wachovia, Xerox


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