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The $700 billion in funding being discussed is meant to be used to set up a new federal agency that could essentially buy discounted and distressed assets from the banking system. Such an arrangement will create liquidity and at the same time alleviate investor anxiety about the balance sheet condition. It will also help financial firms raise capital and expand credit to support growth. That said, Barclays believes that the shocks to confidence have resulted in some of the problem being transferred to the demand side of the economy. If that is the case, the mere unclogging of the financial system to improve the potential supply of credit will not help. The Fed may be forced to wield its main monetary policy weapon, namely the fed funds target rate.
Tighter credit conditions are having a deleterious effect on individuals and companies. Companies are finding it tough to raise finances, with some them forced to reduce capacity or shutdown operations, which in turn has put a strain on the labor market.
The final second quarter GDP report released this week showed that the economy grew at a downwardly revised 2.8% rate, with the Commerce Department revising down consumer spending growth for the quarter. However, the price gauges of the report were left unchanged. Wachovia Securities expects growth to remain positive in the third quarter and then taper off and dip into negative territory in the fourth quarter and possibly in the first quarter of 2009 as well. Global Insight economists is of the view that the bailout plan being debated on Capitol Hill would not serve as a means of preventing a recession, but as a way of reducing its severity.
Along with the slowdown in the U.S. growth, economists foresee a slowdown in global growth. State Street expects global growth to decline to 3.8% in 2008 and 3.1% in 2009, slower than the 4.9% growth in 2007.
The weekly jobless claims report for the week ended September 20th showed a big increase in claims to 493,000. Meanwhile, the durable goods orders fell 4.5% on a monthly basis in August. Wachovia believes some of the weakness could be attributed to difficult credit conditions, as firms are being forced to hoard capital by putting off expansion plans and scaling back hiring.
The National Association of Realtors said existing home sales slid 2.2% in August to a seasonally adjusted annual rate of 4.91 million units compared to the consensus estimate of 4.93 million units. On a year-over-year basis, existing home sales slipped 10.7%. The median sales price of an existing home fell to $203,100 in August, down 9.5% from a year-ago. Inventories of new homes declined to 10.4-months of supply at the current sales pace from 10.9 months in July. Even more dismal was the report on new home sales, which showed an 11.5% drop in the sales of new homes in August.
Home sales may be moving closer to a bottom, although inventories are too high. The lackluster home sales have led to construction cuts by builders. Therefore, residential investment is expected to be a drag on growth through early next year.
The upcoming week assumes significance, given the scheduling of a few key first-tier economic reports for the week. The markets are likely to focus on the personal income and spending report for August, the results of the Institute for Supply Management's manufacturing and non-manufacturing surveys for September and the Labor Department's non-farm payrolls report for September.
Additionally, traders could also sift through the Conference Board's consumer confidence index for September, the NAPM-Chicago's business barometer for September, the Commerce Department's construction spending and factory goods orders reports for August. The regularly scheduled weekly jobless claims report and the oil inventory report may also elicit some reaction from the markets.
Economists expect an increase in personal income due to increases in average hours worked and average hourly earnings. Disposable personal income, which is personal income less current taxes, is likely to decline due to the fading impact of the tax rebate stimulus. Slackness in retail spending was overcome to some extent by an increase in vehicle sales, and therefore personal spending is expected to see some strength.
Meanwhile, consumer confidence is poised to recede after showing some semblance of a recovery in the previous month. A rise in the unemployment rate, hurricane damage to the U.S. Gulf of Mexico region and the continuing turmoil in the financial market may have impacted confidence. Wachovia Securities expects consumer spending to contract in the second half of the year.
The ISM's manufacturing survey is likely to linger around the cut-off mark of '50'. The mixed readings of the regional manufacturing indexes confound the outlook for the sector. The prices paid should continue to decline, given the lower oil prices that prevailed for most of September. Imports and exports, which increased in August, may slowly begin to show weakness.
Most economists predict incremental weakness for the labor markets, with employment conditions impacted by worker displacement due to hurricanes Ike and Gustav and the strike at Boeing. Wachovia expects job losses in manufacturing, construction and financial services sectors. However, job growth in the healthcare and government sectors should help offset some of the declines. The unemployment rate is likely to have stayed around the previous month's level. Specifically, Barclays expects a 0.3% month-over-month increase in average hourly earnings.
Monday
The Bureau of Economic Analysis is scheduled to release its personal income & outlays report for August on Monday. Economists estimate the report, which is due out at 8:30, to show a 0.2% increase in both personal income and personal spending.
Personal income declined 0.7% in July compared to the 0.2% decline expected by economists. The July reading represented the first decline since August 2005. Meanwhile, personal consumption expenditure climbed 0.2%, in-line with economists' expectations. Personal current transfer receipts declined 6.9% in July compared with a 1% decline in June.
The spending growth slowed from the 0.6% increase in the previous month, as spending on durable goods fell 1.5%, a steeper decline than the 1.3% drop witnessed in June. Spending on non-durable goods increased at a slower rate of 0.3%. The core Personal Consumption Expenditure Index rose 2.4% year-over-year, up 2.3% in the previous month, marking the biggest increase since February 2007.
Tuesday
The results of the National Association of Purchasing Management-Chicago's business survey for September are scheduled to be released at 9:45 AM ET on Tuesday. Economists expect the business barometer index, based on the survey, to be 54.
In August, the Chicago business barometer rose 7 points to 57.9, with production and new orders indexes climbing 14.2 and 6.7 points, respectively to 63.4 and 60.2. The order backlog index also increased, rising 17.3 points to 63. However, the employment and inventories indexes declined, with the employment index falling 5 points to 40. Despite the 10 point-tumble, the prices paid index remained elevated at 80.6.
The Conference Board is scheduled to release its consumer confidence report for September at about 10 am ET on Tuesday. The survey, which is based on a survey of 5,000 US households, is expected to show that the consumer confidence index eased to 55 in September.
The index rose 5 points in August to 56.9, marking the second consecutive months of gains. While the expectations index increased 10.1 points to 52.8, the current conditions index declined 2.6 points to 63.2. Much of the optimism is traced back to the recent pullback in energy prices.
Wednesday
The ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 AM ET on Wednesday. The report is usually released two days prior to the Labor Department's employment report.
The Commerce Department's construction spending report to be released at 10 AM ET on Wednesday is expected to show a 0.5% decline in construction spending for August.
Construction spending declined 0.6% in July compared to the previous month. June's reading was revised up to show a 0.3% gain from the originally reported 0.4% decline. Spending on private residential construction fell 2.3% compared to a 0.7% drop in spending on non-residential constriction. However, public construction spending climbed 1.4%.
The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET on the same day. Economists expect the index to show a reading of 50 for September.
Manufacturing activity contracted in August, with the purchasing managers' index dipping 0.1 point in August to 49.9. That said, the decline was not as steep as the drop expected by economists. While the production index fell 0.8 points to 52.1, the new orders index, although rising 3.3 points, remained in the contraction zone at 48.3. Reflecting the weak labor market conditions, the employment index fell 2.2 points to 49.7. Meanwhile, the prices paid index declined by 11.5 points to 77. On a positive note, the index of export orders rose by 3 points to 57.
The Energy Information Administration is also due to release its weekly oil inventory report at 10:30 AM ET on Wednesday.
Crude oil inventories declined by 1.5 million barrels in the week ended September 19th to 290.2 million barrels and are in the lower half of the average range for this time of the year.
Gasoline inventories fell by 5.9 million barrels and are below the lower boundary of the average range, while distillate stockpiles dropped by 4.2 million barrels and are in the lower half of the average range for this time of the year. Refinery capacity utilization averaged 77.8% over the four-weeks ended September 19th compared to 82.9% in the previous week.
Thursday
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.
The ECB held interest rates steady at 4.25% at its September meeting after maintaining rates at that level at the previous meeting. The last revision in rates was in July, when the central bank raised them by 25 basis points. The interest rate on the marginal lending facility was held at 5.25%, while the interest rate on the deposit facility was retained at 3.25%. The inflation rate in the euro zone region remains well above the central bank target of 2%.
A Labor Department report on the number of individuals claiming unemployment benefits during the week ended September 27th is scheduled to be released at 8:30 AM ET on Thursday.
In the week ended September 20th, jobless claims rose to 493,000 from the previous week's revised figure of 461,000. The increase came as a surprise to economists, who had been expecting jobless claims to edge down to 450,000 from the originally reported reading of 455,000.
The Labor Department also said that the less volatile four-week moving average rose to 462,500 from the previous week's revised average of 446,500. At the same time, the report showed that continuing claims in the week ended September 13th increased to 3.489 million from the preceding week's revised level of 3.461 million.
The Commerce Department is due to release its report on factory goods orders for August at 10 AM ET on Wednesday. Orders for manufactured goods are likely to have decreased 1.8% in the month.
In July, factory goods orders rose 1.3% to $465.4 billion, with the orders for durable goods rising 1.3%. The increase was aided by a 3.2% increase in transportation equipment orders. Shipments of factory goods rose 2.1% compared to a 0.7% increase in unfilled orders. Meanwhile, inventories edged up 0.5% during the month.
The durable goods orders report for August released this week showed that order growth for items that are designed to last for more than 3 years fell 4.5% on a monthly basis. Durable goods orders form the bulk of the orders for factory goods. Excluding the volatile transportation orders, orders fell 3% following a downwardly revised 0.1% growth in July. Non-defense capital goods orders, excluding aircrafts, fell 2%.
Friday
The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM on Friday. The report sheds light on the number of paid employees working part time or full time in the nation's business and government establishments, the number of hours worked in the non-farm sector, the basic hourly rate for major industries and the number of unemployed as a percentage of the labor force. Economists estimate that the U.S. economy lost 90,000 jobs in September and look for an unemployment rate of 6.1%.
In August, the U.S. economy lost 84,000 jobs, which was worse than the 75,000 job losses predicted by economists. The previous month's job loss was revised up to 60,000 from the originally reported decline of 51,000. The unemployment rate rose to 6.1%, higher than the 5.7% rate expected by economists. Average hourly earnings rose 0.39% to $18.14.
Among the sectors, the good producing sector lost 57,000 jobs, with the construction and manufacturing sectors losing 8,000 and 61,000 jobs, respectively. Meanwhile, the services sector lost 27,000 jobs. Retail trade and professional and business services lost about 20,000 and 53,000 jobs, respectively. The leisure and hospitality segment shed 4,000 jobs, while the government and the leisure and hospitality sectors added 55,000 and 17,000 jobs.
The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM ET on Friday. The non-manufacturing index is likely to show a reading of 50 for September.
The non-manufacturing index rose to 50.6 in August from 49.5 in July. The new orders and supplier deliveries indexes rose in the month, while the employment index fell to 45.4 from 47.4 in the previous month.
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