Economic strains are now coming to the fore, with the labor market barely budging despite GDP increasing at a fairly modest pace in the aftermath of the recent recession. Until employment picks up, it is unlikely that consumer spending, which fuels one-third of the economic activity, shows strength. The recovery thus far has ridden on the back of capital spending, inventory building and fiscal stimulus measures.
In the past week, the Labor Department said non-farm payroll employment fell by 131,000 in July following a revised 221,000 decline in June, with the bulk of the decline due to the government shedding temporary census workers. However, private sector payrolls rose by 71,000 in July, though short of the 125,000 addition expected by the market. The unemployment rate remaining unchanged is also a positive development, as it came about due to the labor force continuing to contract.
Last week, the Commerce Department said personal income as well as spending remained almost unchanged in June compared to the previous month. Wages and salaries fell 0.1% while rental income, dividend income and current transfers saw growth. Meanwhile, real disposable income rose 0.2% and the savings rate rose one-tenth of a percentage point to 6.4%. The core consumer price index remained unchanged on a monthly basis, while it was up 1.4% year-over-year.
Economists see a silver lining in the data. Given the fact that the savings rate has been increasing, consumer spending, which has remained subdued throughout most of the recovery, may see a gradual pick up in the second half of the year.
The National Association of Realtors' pending home sales fell by 2.6% month-over-month in June following a steeper 29.9% drop in May. Economists had expected the index to decrease by 5%. The data portends more weakness for existing home sales.
A report released by the Commerce Department showed that factory goods orders fell 1.2% month-over-month in June, steeper than the 0.5% drop expected by economists. The government also downwardly revised its previous estimate for durable goods orders to show a decline of 1.2% from a 1% drop, while non-durable goods orders were down 1.3%.
However, there were some encouraging signs as well. The Institute for Supply Management's manufacturing index declined 0.7 points to 55.5 in June, while economists had expected a steeper 1.7-point decline. The new orders index fell by 5 points to 53.5 and the order backlog index slipped 2.5 points. However, on an encouraging note, the employment index rose a point to 58.6. That said, the fact that only 10 of the 18 industries surveyed reported growth is worrisome.
Meanwhile, its non-manufacturing index rose to 54.3 in July from 53.8 in June. Economists had expected a slight dip to 53. While the new orders index rose 2.3 points to 56.7, the business activity index edged down 0.7 points to 57.4 and the backlog of orders index declined by 3.5 points to 52. The employment index rose back up above the 50 level to '50.9.' Out of the 18 industries surveyed, 13 reported growth and 4 reported contraction.
The Commerce Department's construction spending report showed a 0.1% month-over-month increase in June. However, taking some sheen off the growth, May's reading was downwardly revised to show a 1% decline compared to the 0.2% drop estimated initially. The strength reflected a 1.5% jump in public construction spending, which benefited from government stimulus support. However, private construction spending edged down 0.6%.
Although there is little chance of seeing a surprise, the FOMC meeting is likely to headline the macroeconomic events of the unfolding week. The Commerce Department's retail sales report, the weekly jobless claims report and the Reuters/University of Michigan's consumer sentiment report are among the other important economic reports due for release.
The preliminary second quarter productivity and costs report, the Commerce Department's wholesale and business inventories reports, the consumer price inflation report, the Commerce Department's trade balance report, the import and export prices data and the treasury budget round up the other economic events of the week. Traders may also focus on the results of the Treasury auctions of 3-year and 10-year notes and 30-year bonds.
Despite some recent data points surprising to the downside, the Federal Reserve is unlikely to announce any new easing measures at the upcoming meeting. However, most economists expect the Fed to downgrade its assessment of economic conditions. The Fed will most likely stay on hold, while maintaining the cautious tone of prior statements.
After seeing some softness in recent months, retail sales may see a bounce, supported by a rise in gasoline prices. Additionally, the headline number may receive some support from auto sales, which saw a fairly strong performance in July. However, underlying sales growth could be soft, given the lackluster chain store sales reported for the month.
With energy prices expected to rise due to seasonal adjustments, headline consumer price inflation should accelerate in July. However, the core inflation rate is expected to remain unchanged. Going by the mild core inflation in recent months, BNP Paribas expects the trend towards disinflation to continue in the quarters ahead.
Monday
There are no important economic reports due to be released on Monday.
Tuesday
The U.S. Labor Department is also scheduled to release its preliminary report on second quarter non-farm productivity and unit labor costs at 8:30 AM. Economists expect productivity growth of 0.1% for the quarter. In the first quarter, non-farm productivity rose by 2.8%, while unit labor costs fell by 1.3%.
The Commerce Department is due to release its wholesale inventories report at 10 AM ET. Economists expect wholesale inventories at the end of June to show a 0.4% increase.
In May, wholesale inventories saw a 0.5% month-over-month increase. However, the previous month's increase was downwardly revised to show 0.2% growth. Wholesale sales fell 0.3%, marking the first decline since February 2009.
The Federal Reserve Open Market Committee is scheduled to meet on Tuesday and make an announcement regarding its near-term direction of monetary policy at 2:15 PM ET. The Federal Open Market Committee consists of seven Governors of the Federal Reserve Board and five Federal Reserve Bank Presidents.
At its June meeting, the Federal Open Market Committee maintained the fed funds futures rate unchanged at 0%-0.25% and also retained the statement conveying its intention to leave interest rates at exceptionally low levels for an extended period. As in the past meeting, Kansas City Federal Reserve Bank President Thomas Hoenig dissented, calling for the dropping of the statement reflecting the central bank's faith in an extended period of low rates.
In the post meeting policy statement, the FOMC termed the economic recovery as "proceeding" compared to its earlier assessment that economic activity continued to strengthen. The committee said labor market is improving gradually. The central bank noted that household spending is increasing, suggesting some progression from April, when it said growth in household spending is picking up. While discussing housing starts, the committee noted that they are remaining at depressed levels.
There was a marked change in the way the FOMC saw financial market conditions, with the central bank saying that financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. In April, the Fed had said financial market conditions remain supportive of growth.
The Fed also made a note of falling prices of energy and other commodities in recent months, while continuing to believe that inflation will remain subdued for some time.
Wednesday
The trade gap data for June is due out at 8:30 AM ET. Economists estimate that the trade gap widened to $42.5 billion in the month. The trade gap measures the difference between imports and exports of both tangible goods and services.
Imports in the month of May rose at a slightly faster pace than exports, resulting in an unexpected increase in the size of the U.S. trade deficit. The trade deficit widened to $42.3 billion in May from $40.3 billion in April. The wider trade deficit came as a surprise to economists, who had expected the trade deficit to narrow to $39.4 billion.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended August 6th at 10:30 AM ET.
Crude oil inventories fell by 2.8 million barrels to 358 million barrels in the week ended July 30th. Inventories of crude oil remained above the upper limit of the average range.
At the same time, gasoline inventories edged up by 0.7 million barrels and were above the upper limit of the average range. Distillate stockpiles rose by 2.2 million barrels, remaining above the upper boundary of the average range. Refinery capacity utilization averaged 91.2% over the four-weeks ended July 30th compared to 90.6% in the previous week.
The Treasury Budget, a monthly account of the surplus or deficit of the federal government is due to be released at 2 PM ET. The budget is considered as an indicator of budgetary trends and the thrust of fiscal policy. Economists estimate a deficit of $169 billion for July.
Thursday
The Labor Department is due to release its customary jobless claims report for the week ended August 7th at 8:30 AM ET. Economists expect a decline in claims to 465,000.
Initial jobless claims rose to 479,000 in the week ended July 31st from the previous week's revised figured of 460,000. The increase came as a surprise to economists, who had expected jobless claims to edge down to 455,000 from the 457,000 originally reported for the previous week.
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.
Import prices declined for the second consecutive month in June, while export prices saw a modest decrease. Import prices fell by 1.3% in June after slipping by a revised 0.5% in May. Excluding a 4.0% drop in prices for fuel imports, import prices fell by a more modest 0.6%
Export prices edged down by 0.2% in June following a revised 0.6% increase in the previous month. Export prices still fell 0.2% excluding a 0.1% drop in prices for agricultural exports
Friday
The consumer price index for July is scheduled to be released at 8:30 AM ET. 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 0.2% increase in the consumer price index, while the core consumer price index that excludes food and energy is likely to have risen 0.1%.
Consumer prices showed a modest decrease in the month of June, with prices falling for the third consecutive month amid another notable decrease in energy prices. Consumer prices edged down by 0.1% in June following a 0.2% drop in May and a 0.1% decrease in April.
The modest decrease in prices came in line with the expectations of economists.
Meanwhile, core prices, which exclude food and energy prices, increased by 0.2% in June after edging up by 0.1% in May. Economists had expected core prices to rise by 0.1%
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. For July, economists estimate a 0.5% decline in retail sales, while retail sales excluding autos is likely to have risen 0.2%.
Retail sales fell 0.5% month-over-month in June, steeper than the 0.2% expected by economists. Retail sales, excluding autos, declined 0.1%, while economists expected an unchanged reading. Auto sales fell 2.3%, steeper than the 0.6% drop in the previous month.
Gasoline sales declined 2%, while sales decline at building material & garden equipment store sales slowed to 1.1% from the 9% drop in the previous month. On the other hand, sales at electronics & appliance stores, general merchandise stores and miscellaneous retail stores increased.
The preliminary report of the Reuters/University of Michigan's consumer sentiment survey for August is scheduled to be released at 9.55 AM ET. The consumer sentiment index is expected to increase to 70 from July's 67.80.
The Commerce Department is scheduled to release its business inventories report for June at 10 AM ET. The report summarizes the results from the monthly retail trade, wholesale trade and factory goods orders surveys. The report is expected to show a 0.2% increase in business inventories for the month.
Business inventories rose 0.1% month-over-month in May, slightly softer than the 0.2% increase expected by economists. However, business sales declined by 0.9%, resulting in an increase in the inventories to sales ratio to 1.24 from 1.23 in April.
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