Keeping an eye on the economy
July 13 — There could be another day of economic reckoning ahead for Wall Street, with a trio of key government reports due out Friday. Investors are watching closely to see if the numbers confound or contradict the slowdown scenario that’s so pleasing to stock and bond market bulls.
THE THREE REPORTS — on wholesale inflation, retail sales and industrial production — are expected to be fairly tame and shouldn’t rattle the market, which has enjoyed two days of gains.
Retail sales are expected to have risen 0.3 percent in June — up 0.4 when autos are excluded, according to a CNBC/Dow Jones poll. The Producer Price Index, which measures wholesale sector inflation, is expected to jump by 0.6 percent. But minus surging energy prices and food, the so-called “core rate” is forecast to have risen at only 0.1 percent.
Friday’s economic report card is rounded it out with the latest on industrial production, which is expected to gain 0.1 percent.
The hope is that the numbers confirm earlier reports showing a slowdown in the U.S. economy. That will make the Fed less inclined to raise interest rates to cool what has been a prolonged surge in economic growth that has produced tight supplies of labor and materials — both of which are ingredients for higher inflation.
SHOPPERS STILL SHOPPING
While sales may be slowing for some retailers, on Madison Avenue in New York, upscale consumers are continuing their shopping spree.
“I expect things to be strong at least through the elections,” said Anthony D’Ambrosio, Executive V.P. at watch retailer Tourneau in New York city. “We think that with some of the new product introductions in our category, that there has been a great, great demand for a lot of this product up to the point that our suppliers can’t keep up with the demand.”
Sales of luxury items like fancy watches have held up amazingly well this year — running counter to sales in the rest of the economy, where the Federal Reserve is hoping to engineer a soft landing.
“The economy is not falling apart, it’s just not growing as fast as it was growing earlier in the year and all through last year,” said Merrill Lynch Chief Economist Bruce Steinberg. “In the case of the consumer, consumer spending in second quarter probably rose at a three percent rate. That’s not bad, but it’s the slowest pace in three years.”
Higher gasoline prices propelled retail sales higher in June, but less robust gains are expected in other categories.
Surging energy prices will also account for an outsized gain in June producer prices. Investors got another reminder of that Thursday, when the government reported that a surge in imported oil prices more than offset a decline in the cost of imported consumer goods in June, boosting overall U.S. import prices 0.8 percent last month.
The price tag on petroleum imports skyrocketed 7.0 percent last month after rising 4.8 percent the previous month. The June gain was the biggest since February and was the 14th rise in the past 16 months.
Imported petroleum prices have risen more than 80 percent since June last year, leading to a run-up in prices of gasoline at the pump. But with recent noises about increased production from the Organization of Petroleum Exporting Countries, some analysts think oil prices may have peaked for now.
“I think they will ease a bit, meaning a few dollars a barrel as we move through the third quarter and into the fourth quarter,” Banc of America Securities oil analyst William Randol told CNBC.
Randol’s current estimate calls for an average price of $25 a barrel for West Texas crude in the third quarter and $24 in the fourth quarter, though he concedes those may be “a little low.” And while record low inventories of refined products like gasoline and heating oil are slowly being rebuilt, supplies will likely remain tight for the rest of the year, says Randol.
Import prices outside the energy sector remained subdued, and analysts noted that the dollar’s strength against other major currencies was helping to keep a lid on prices of goods from abroad.
“As long as the dollar remains strong, the threat of inflation should be contained,” said Gary Thayer, chief economist at A.G. Edwards and Sons Inc. in St. Louis, Mo.
Economists and Fed officials will get another reading on inflation next week with the release of the government’s Consumer Price Index for June.
FACTORIES HUMMING
Friday’s economic round-up also includes an update on industrial production, a snapshot of the level of output of the nation’s factories. A healthier manufacturing sector is expected to keep industrial production rolling at a moderate pace in June.
But the strength belies an underlying slowdown — a shift that began showing up in the economic data in May, when growth in industrial production fell to a 0.4 percent gain from 0.7 percent gains in March and April.
International Paper chief financial officer John V. Faraci says he’s seeing that slowdown. The paper giant posted big first quarter profits aided by some new-found paper pricing power.
“This is probably the first time since the Asian crisis that we have all the major economies around the world showing positive GDP growth,” he said. “A slowing economy, from our perspective, that’s not growing at an unsustainable rate, is probably better for our industry and other industries as well.”
Other recent reports on the labor front have also provided signs of a slowing U.S. economy. The last two monthly employment reports have pointed to some easing of the recent surge in job creation. In a separate report Thursday, the Labor Department said the number of people lining up to receive first-time unemployment benefits rose to the highest level since June last year. Initial jobless claims reached 319,000 in the week ended July 8, up 27,000 from the previous week.
But department officials said initial reports indicate most of the claims can be attributed to layoffs in the automotive industry due to annual retooling by car manufacturers, which only lasts for a couple of weeks.
“Much of this change is probably due to auto,” a Labor Department spokeswoman said, noting that the government will have more information next week when the states turn in anecdotal information to explain the rise.
The four-week moving average of claims, which smoothes out weekly gyrations, rose to 305,000, up more than 5,000 from the previous week.
Analysts welcomed the increase in claims, noting that it fits in with other recent data that have shown the U.S. economy may be slowing to a more sustainable pace.
“The trend has been toward higher claims over the last several months,” A.G. Edwards and Sons’ Thayer said. “Jobless claims should be good news for the Fed, it means there is less of a threat of the economy overheating.”
WILL THE FED HIKE AGAIN?
Despite the signs of a slower economy, many economists still expect the Federal Reserve to raise interest rates at its August meeting.
Seven of 10 economists polled by CNBC.com last week after Friday’s soft employment report still project a rate hike next month. Six see a quarter-point move up to 6.75 percent from the current 6.50 percent, while one forecasts a half-point increase to 7.00 percent.
In general, the experts worry that economic growth has cooled only temporarily and could re-ignite inflation fears in the months ahead.
Further, some believe the Fed wants to enforce a bit more restraint now so it can duck to the sidelines during the peak of the election season this fall. Regardless of their expectations for August 22, none of the 10 foresee additional increases in October or November. |
