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Last week, the Bureau of Economic Analysis reported that personal income rose a better than expected 0.1% in June, benefiting from a 0.2% increase in compensation and a 0.6% gain in proprietor's income. However, transfer payments fell 1.1% due to smaller fiscal payouts in May. Despite the gain in the personal income for June, wages and salary growth has slowed to 3.3% over the last three months compared to 5% plus growth in the previous two years.
In tandem with the slowdown in wages, spending has also slowed. Real consumer spending is growing at an anemic pace. Though personal consumption rose 0.6% in June, the bulk of the increase was due to higher prices. Real personal consumption, which is adjusted for inflation declined by 0.2% in June. The PCE deflator rose 0.8% in June compared to the previous month and climbed to 4.1% year-over-year, while the annual rate of the core PCE deflator was 2.3%.
According to Wachovia, much of the benefit from the economic stimulus checks will be siphoned away by higher energy prices. However, offering a ray of hope that things will turn around, energy prices have retraced some of their upward move. If the trend is sustained, it is likely that inflation becomes less of a concern and begins to ebb along with the slowing growth. With the tighter credit standards and rock bottom consumer sentiment impacting the purchase of durable goods, it will not be a surprise if consumer spending turns negative in the third quarter, marking the first drop in 18 years.
Meanwhile, the Commerce Department said factory goods orders climbed 1.7% in June from the previous month. The increase was mainly due to an increase in oil prices, which pushed up the nominal value of petroleum orders. Shipments rose 1.6%, while inventories increased by 1%, which suggests that inventory values used in the second quarter GDP estimate may be revised up.
Pointing to the slowing growth in non-defense capital goods orders, excluding aircrafts- a proxy for capital spending, which has slowed from a 2.9%year-over-year rate in June from about 10% in the 2004-2006 period, Wachovia Securities said it expects business spending to remain insipid in the second half of the year. The view gains strength due to the fact that corporate profits are dwindling, credit lines are tightening and the economy is set to grow at a slower-than-expected pace in the coming months. Another worrisome data point is the Institute for Supply Management's non-manufacturing index, which moved into the contraction zone in July. Additionally, new orders and employment indexes of the survey remain below the neutral zone, suggesting more bleakness ahead.
Among the other data released during the week, the National Association of Realtors' pending home sales index for June rose 5.3% in June to 89, with gains reported by all regions. The biggest increase was noted in the South. Meanwhile, the Federal Reserve's consumer credit report showed a $14.3 billion increase in consumer credit in June compared to an upwardly revised reading of $8.1 billion for May. Revolving credit increased by $5.5 billion compared to an $8.8 billion increase in non-revolving credit.
With the economy remaining in a state of flux, the markets are likely to scan each piece of economic evidence to get more clarity on the direction of the economy. The upcoming week's economic calendar is heavily loaded, with a few key market-moving first-tier economic reports scheduled to be released. Traders may look forward to the release of the Commerce Department's retail sales report for July, the Labor Department's consumer price inflation report for July and the Federal Reserve's industrial production report for July.
Additionally, the markets may also stay tuned to the results of the New York Fed's manufacturing survey, the University of Michigan's consumer sentiment index for August, the trade gap report for June and the import and export price indexes for July. The regularly scheduled weekly jobless claims report and the oil inventory reports along with the Commerce Department's wholesale inventories report may also be in the radar.
Notwithstanding weak auto sales, the retail sales report for July is likely to show a gain. The nation's retailers reported fairly insipid results for July, with only discount retailers and wholesale clubs turning in commendable performances. Gasoline prices have also declined in the month. However, Wachovia Securities expects online store sales to show strong sales.
Given the pullback in oil prices in July, consumer price inflation for the month is expected to show an improvement. We are also seeing some let-up in food prices. The core consumer prices are also likely to remain benign, as weaker auto, shelter and apparel costs help offset higher costs of medical care and airline tickets.
The trade balance report for June is expected to show a strong rebound in the imports of petroleum products. However, much of the increase is likely to be offset by slowing growth in non-petroleum imports, as soft domestic growth curbs demand. Exports may continue to ride on the back of a still-vibrant global economy. On a positive note, the real trade deficit, which is used in the calculation of GDP, has been narrowing and contributing significantly to growth.
Meanwhile, State Street Global Advisors expects the July industrial production report to be weaker than June's. Auto and utility output should see some weakness from the previous month's solid gains.
Monday
There are no significant economic reports to be released on Monday.
Tuesday
The trade gap data for June is due out at 8:30 AM ET on Tuesday. Economists estimate that trade gap widened to $61.9 billion in the month. The trade gap measures the difference between imports and exports of both tangible goods and services.
In May, the deficit on trade in goods and services narrowed to $59.8 billion from a revised deficit of $60.5 billion for April. Economists expected the deficit for May to widen to $62.2 from the originally reported deficit of $60.9 billion for April.
Exports increased $1.4 billion to $157.6 billion compared to a $0.7 billion increase in imports to $217.3 billion. Overall, the deficit on trade in goods declined $0.5 billion to $72.5 billion, while the services surplus increased $0.2 at $12.7 billion.
Wednesday
The export & import price indexes for July, which gives the changes in the prices of non-military goods and services traded between the U.S. and the rest of the world, are due out at 8:30 AM ET on Wednesday.
The export and import prices report for June showed that imports remained flat and exports increased at a faster pace. In June, the import price index was up 2.6%, the same pace as in the previous month. Petroleum and non-petroleum import prices were up 7.4% and 0.9%, respectively.
Export prices rose at a 1% rate, faster than the 0.4% rate in the previous month. Agricultural exports climbed 2.2% compared to a 0.9% rise in exports of non-agricultural commodities.
Retail sales of food and retail companies with one or more establishments that sell merchandise and associated services to final consumers are slated to be released at 8:30 AM ET on Wednesday. Economists estimate 0.5% growth in the retail sales for July, while they estimate a 0.6% increase in the retail sales, excluding autos.
In June, retail sales rose 0.1%, with the increase coming in below the expected increase of 0.4%. Year-over-year, retail sales were up 3%. Sales, excluding autos, climbed 0.8%, slower than the 1.2 % rate in the previous month and the 0.9% rate expected by economists. Sales at motor vehicle & part dealers plunged 3.3% compared to the previous month and it declined 9.5% from the year-ago period.
Sales at electronics & appliance stores and building material & garden equipment & supplies declined 0.6% compared to 1.7% growth in the previous month. On the other hand, gasoline station sales climbed 4.6%, faster than the 3.3% growth witnessed in the previous month.
The Commerce Department is scheduled to release its business inventories report for June at 10 AM ET on Wednesday. The report summarizes the results from the monthly retail trade, wholesale trade and factory goods orders surveys. The report is expected to show a 0.5% increase in business inventories for the month.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday.
In the week ended August 1st, crude oil inventories rose by 1.7 million barrels to 296.9 million barrels and are now in the lower half of the average range for this time of the year. Distillate fuel inventories increased by 2.8 million barrels, while gasoline inventories declined by 4.4 million barrels. Refinery capacity utilization averaged 87.7% over the four-weeks ended August 1st compared to 88.2% in the previous week.
Thursday
The consumer price index for July is scheduled to be released at 8:30 AM ET on Thursday. The index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The consensus estimates call for a 0.4% increase in the headline consumer price index and a 0.2% rise in the core consumer price index that excludes food and energy.
Consumer prices rose 1.1% in June, faster than the expected increase of 0.7%. The retail price inflation represented deterioration from the 0.6% rate in May and represented the fastest rate of increase since November 2007.
The core reading that excludes the volatile components, namely food and energy, showed a 0.3% increase, faster than the expected increase of 0.2%. In May, the core reading had showed a 0.2% increase.
Food prices rose 0.7% in June compared to a 0.3% increase in the previous month, while apparel prices edged up 0.1%, reversing some of the 0.3% decline in May. Transportation prices rose 3.8% in June compared to a 2% increase in May. The growth in the prices of housing was 0.5% in June, the same pace as in the previous month.
The Labor Department is due to release its customary weekly jobless claims report for the week ended August 9th at 8:30 AM ET on Thursday.
The number of individuals claiming unemployment benefits rose 7,000 in the week ended August 2nd to 455,000 from the previous week's unrevised average of 448,000. Economists had expected claims to have eased to 420,000
The four-week average that removes volatility rose 26,750 in the recent week to 419,500 from the previous week's revised average of 392,750. Continuing claims, which is calculated with a week's lag, rose 31,000 in the week ended July 26th to 3.311 million.
Friday
The results of the New York Federal Reserve's empire state manufacturing survey, which elicits response from 200 manufacturing executives in New York state, is slated to be released at 8:30 AM ET on Friday. The headline general business conditions index for August is expected to improve to -5.
The general business conditions index of the Empire State survey by the New York Federal Reserve rose 3.8 points in July to -4.9 points. Nevertheless, the index remained in contraction zone. Economists had expected the index to improve to -8.
The indexes of new orders and shipments rose into positive territory, while the index of unfilled orders was negative and lower than its June levels. Meanwhile, the prices paid and prices received indexes rose to record levels. The employment dipped below zero. On a negative note, the future general business conditions index fell sharply to its lowest level since September 2001.
The Treasury Department is due to release a report on the flows of financial instruments into and out of the U.S. for May at 9 AM ET on Friday.
The industrial production report of the Federal Reserve is due out at 9:15 AM ET on the same day. Economists estimate that industrial production remained unchanged in July, while capacity utilization is expected to come in at 79.8%.
The industrial production for June rose 0.5% following a 0.2% decline in May. Economists expected an unchanged reading for the month. The manufacturing output rose 0.2% and mining output rose 1.1%, while the output of utilities increased 2.1%. Manufacturing output was aided by a lift in the production of motor vehicles and part. Excluding the category, manufacturing output was down 0.1% in the month. The rate of capacity utilization rose 0.3 percentage points to 79.9% in June, but it was down 1.1 percentage points below its average for 1972-2007.
The University of Michigan's preliminary report on consumer sentiment index for August is scheduled to be released at 10 AM ET on the same day. Consumer confidence is expected to tick down in the month, with economists forecasting a modest rise in the index to 62 in August from 61.2 in the previous month.
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