Economy Avoiding Recession on Stimulus Package?

Sun. August 03, 2008; Posted: 03:26 PM

(RTTNews) - Finally, some evidence supporting claims that the U.S. economy may have been through a recession emerged, as the Commerce Department revised down its estimates for fourth quarter GDP of 2007 to a small negative growth. However, economists are now more sanguine. They feel the contraction is too small and too brief too call a recession. The second quarter GDP rose 1.9%, slower than the consensus estimate of 2.3%, but was adequate to be termed a solid bounce back achieved on the back of the economic stimulus package.

The shortfall relative to the estimate was mainly due to a sharp retreat in inventory investment. Net exports contributed a solid 2.4 percentage points in the second quarter compared to 0.8 points in the first quarter. Housing investment declined by 15.6%, slower than the 25.1% drop in the previous quarter, and deducted 0.6 percentage points from growth.

Housing market continued to turn in disappointing results. The S&P Case-Shiller's 20-city composite index fell 15.8% compared to the previous year, while the 10-city composite index fell 16.9%. On a monthly basis, the 20-city composite index declined 0.9%, which incidentally is the smallest percentage drop since September 2007. Construction spending declined a worse-than-expected 0.4% in June. However, as a consolation, May's reading was revised to show no change from the previously reported 0.4% drop.

Notwithstanding the semblance of improvement, Lehman Brothers expects national home prices to fall further and not stabilize until the end of next year. According to the firm, the housing market is still largely out of balance, keeping downward pressure on home prices.

As expected, the economy lost jobs for the seventh straight month in July. A Labor Department report showed that non-farm payrolls declined by 51,000, which was smaller than the job loss many economists had expected. The manufacturing sector lost jobs at a same pace than in the previous month, while there was some moderation in the rate of job losses in the construction sector. On a worrisome note, employment at temporary staffing companies, which is a predictor of future employment trends continued to decline. Meanwhile, the Labor Department's weekly jobless claims report showed that jobless claims spiked sharply to 448,000 in the week ended July 26th from 404,000 in the previous week.

Notwithstanding the bleak readings on the housing and employment markets, consumer confidence appears to have bottomed out. The Conference Board's consumer confidence index rose to 51.9 in July from an upwardly revised reading of 51 in June. While the expectations index rose to 43 from a record low of 41.4 in June, the present situations index was almost unchanged at 65.3.

While the ISM's survey showed a decline in manufacturing activity in July, the NAPM-Chicago's survey showed that manufacturing activity in the region expanded. The ISM's manufacturing index edged down to 50 in July from 50.2 in June, the Chicago survey's business barometer index rose to 50.8 in July from 49.6 in June.

Against the backdrop of mixed signals from the economy, market attention now turns to the upcoming week, which is likely to be headlined by the FOMC meeting. Apart from the FOMC meeting, the Bureau of Economic Analysis' personal income & outlays report for June, the ISM's non-manufacturing survey for July and the National Association of Realtors' pending home sales index are also likely to be in the radar.

Additionally, traders may focus on the Commerce Department's factory goods orders report for June, the Federal Reserve's consumer credit report for June, the Commerce Department's wholesale inventories report for June and the Labor Department's preliminary report on second quarter non-farm productivity. The regularly scheduled weekly jobless claims report and the Energy Information Administration's petroleum inventory report are also likely to draw the attention of traders.

The Fed is mostly likely to maintain its Fed funds target rate at 2%, as economic conditions continue to remain weak. Additionally, financial markets remain in a state of flux, thereby reducing the chances of monetary policy tightening even amid a surge in inflationary pressures. Wachovia Securities is of the view that we are closer to an interest rate cut than a rate increase. Meanwhile, State Street expects the policy statement to tow in-line with the past meeting's statement.

Global Insight expects personal income to remain flat, as a drop in transfer payments, which benefited immensely from the stimulus tax rebates last month, will offset a small gain in wages and salary disbursement and another solid gain in rental income. The nominal personal spending for June is likely to have increased 0.6% due to higher gasoline, fuel oil and gas prices offset to some extent by weak auto sales.

Wachovia Securities expects real disposable personal income to contract in the second half of the year, as deteriorating labor markets pressure nominal income and the temporary impact of the fiscal package unwinds. The firm expects the PCE to moderate towards 1% in the third quarter compared to an 11.3% rate in the second quarter.

The results of the ISM's non-manufacturing survey are likely to reveal another month of contraction in activity in the services sector. The weakness is mainly due to the slackness in the housing and financial services sector that is expected to weigh down on the services sector performance.

Monday

The Bureau of Economic Analysis is scheduled to release its personal income & outlays report for June on Monday. Economists estimate the report, which is due out at 8:30, to show a 0.1% decline in personal income and 0.5% growth in personal spending.

Personal income increased 1.9% in May, much faster than the expected growth of 0.4%. Meanwhile, personal spending increased 0.8% compared to the 0.7% growth expected by economists.

The better-than-expected income data reflected a 10.2% jump in personal current transfer receipts and a 24.7% decline in personal current taxes. The spending growth was boosted by a 1.2% surge in the spending on non-durable goods. The core Personal Consumption Expenditure Index rose 2.1% year-over-year, the same pace as in the previous month.

The Commerce Department is due to release its report on factory goods orders for June at 10 AM ET on Monday. Orders for manufactured goods are likely to have increased 0.7% in the month.

In May, new orders for manufactured goods rose 0.6% following a 1.3% increase in April. Shipments of the category of goods edged up 0.1% and unfilled orders rose 0.9%, while the inventories index were up 0.5%.

The durable goods orders report for June released earlier in the month showed that the value of orders placed for goods designed to last for more than 3 years rose 0.8% to $215.4 billion. Economists expected a 0.3% decline in the durable goods orders for June.

Excluding transportation, new orders rose 2%, while excluding defense the order growth was 2%. The increase was fueled mainly by an increase in orders for primary metals, which jumped 5.1%. Shipments rose 0.5% and unfilled orders climbed 0.9%. Inventories increased 0.5%. Non-defense capital goods orders, excluding aircrafts,- an indicator of capital spending rose 1.4% in June, reversing the 0.1% decline in May.

Tuesday

The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM ET on Tuesday. The non-manufacturing index is likely to show a reading of 48 for July.

The non-manufacturing survey for June showed a contraction in activity in the sector, with the purchasing managers' index dipping 3.5 points to 48.2. The production and the new orders indexes receded 3.7 and 5 points, respectively, while the employment index fell 4.9 points to 43.8. However, the prices paid index climbed 7.5 points to 84.5.

The Federal Reserve is scheduled to meet on Tuesday to discuss the near-term direction of monetary policy. The Federal Monetary Policy Committee consists of seven Governors of the Federal Reserve Board and five Federal Reserve Bank Presidents.

At its June meeting, the Fed decided to maintain rates unchanged at 2% after implementing a series of interest rate cuts since August 2007 in reaction to the subprime mortgage market crisis.

The June Fed meeting's policy statement offered little comfort to the Street. While acknowledging that the economic environment is fraught with risk, the central bank did not delve much into actions that could be taken to help the economy emerge out of the woods. The Fed is of the view that inflation will moderate later this year and next, though believing that the upside risks to inflation and inflation expectations have increased. The fact that the Fed has changed its timeline for the moderation in inflation from 'the coming quarters' is perceived as a sort of confession that the central bank will not act hastily even inflation surges in the coming months due to adverse base year effects.

On growth, the apex body commented that the downside risks to growth appear to have diminished somewhat. Commenting on the Fed action, Lehman Brothers said the Fed is trying to buy some time in the face of major conflicting signals.

Wednesday

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday.

The EIA's weekly petroleum inventory report showed that gasoline stockpiles declined by 3.5 million barrels in the week ended July 25th. Nevertheless, inventory levels of this category of product are near the upper bound of the average range. While crude oil stocks edged down by 0.1 million barrels, distillate fuel inventories climbed by 2.4 million barrels. Refinery capacity utilization averages 88.2% over the four-weeks ended July 25th compared to 88.8% in the previous week.

Thursday

The nine-member monetary policy committee of the Bank of England is due to hold a two-day meeting ending Thursday to determine the near-term direction of monetary policy. Any change in the policy is announced at 7 AM ET on the same day.

The bank maintained its benchmark interest rates unchanged at 5% at its July meeting. The decision was in-line with expectations, as economists expected the central bank to allow time for its previous policy actions to produce results.

The European Central Bank's Governing Council is scheduled to meet at 7:45 ET on Thursday to determine its interest rate policy. Any change in policy is announced immediately after the meeting, while a statement is read out at a press briefing about 45 minutes after the meeting, followed by a Question & Answer session.

At its last meeting, the European Central Bank announced a 25 basis point increase in its main refinancing operations minimum bid rate to 4.25%. The bank also raised its marginal lending facility and deposit facility to 5.25% and 3.25%, respectively. Till last month, the central bank was in a hold mode since it raised interest rates to 4% on June 7th, 2007. The inflation rate in the euro zone region remains well above the central bank target of 2%, inspiring the central bank to be proactive despite the economic slowdown being experienced domestically and abroad.

The Labor Department is due to release its customary weekly jobless claims report for the week ended August 2nd at 8:30 AM ET on Thursday.

The number of individuals claiming for unemployment benefits rose 44,000 in the week ended July 26th to 448,000 from the previous week's revised average of 404,000. Economists had expected claims to decline to 395,000 from the previously reported reading of 406,000 for the previous week.

The four-week average that removes volatility rose 11,000 in the recent week to 393,000 from the previous week's revised average of 382,000. Continuing claims, which is calculated with a week's lag, rose 185,000 in the week ended July 19th to 3.282 million.

Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, are due out at 10 AM ET on Thursday. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. The consensus expectations call for a 1.3% decline in the index for June.

The pending home sales index for May declined a worse-than-expected 4.7% to 84.7 in May, reversing the upwardly revised 7.1% growth in the previous month. The steepest decline was in the South, where the index declined by 7.1%.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET on Thursday. The consumer credit for June is likely to show an increase of $6 billion.

Consumer credit increased at an annual rate of 3.5% or $7.8 billion in May to $2.57 trillion. Economists had expected a $7 billion increase for the month. Revolving and non-revolving credit increased 7% and 1.2%, respectively.

Friday

The U.S. Labor Department is scheduled to release its preliminary report on second quarter non-farm productivity and unit labor costs at 8:30 AM on Friday. The consensus estimates call for a 2.6% increase in non-farm productivity.

First quarter productivity increased by 2.6% compared to the preliminary reading of 2.2% growth. Economists had expected productivity growth to be revised up to 2.5%.

The bigger than expected upward revision came as output growth during the quarter was revised up to 0.7% from 0.4%, while the drop in hours worked was unrevised at 1.8%. Additionally, unit labor costs increased by 2.2% in the first quarter, unrevised from the previously reported increase.

The Commerce Department is due to release its wholesale inventories report at 10 AM ET on the same day. Economists expect wholesale inventories at the end of June to show 0.6 % growth.

Wholesale inventories at the end of May rose a bigger-than-expected 0.8% from the previous month. Inventories increased 8.7% from a year-ago. Meanwhile, wholesale sales rose at a monthly pace of 1.6% and an annual rate of 13.7%. Non-durable goods were responsible for much of the upside. The wholesale inventories to sale ratio stood at 1.08 in May compared to 1.13 in the year-ago period.

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