Economy

Vital Signs: Will Shoppers Tighten Up?
Source: Business Week
April 12, 2007

On tap: March retail sales, industrial production, consumer prices, and housing starts

Consumers have put the U.S. economy in their shopping bags and carried it along for the past three quarters. But the big questions are when will other areas of the economy snap back, or at least stop dragging the economy down, and can consumers keep up the strong pace of spending. Some important reports coming out this week will help market watchers answer those questions.

The headline tally of retail sales for March is expected to look pretty good. But some further digging will yield more clues on how consumers are doing. Check out how gas station sales fared, as gasoline prices kept climbing during the month. A big gain means lost sales for other areas and indicates a reduction in purchasing power.

Other signs of reduced purchasing power for consumers are expected to pop up in the consumer price index and real earnings data for March. Higher energy and food prices probably pushed up prices by 0.6%. Minus those recently rising components, the March rise should be smaller, although core inflation is still at an uncomfortably high level for Federal Reserve officials.

How much support consumers get from other sectors hinges in large part on how quickly the housing market stabilizes. March housing starts are expected to slip some more. But the number of permits issued is also important. Another slip in permits means builders are scaling back as the spring building season begins. To get a sense of how builders feel about current conditions and prospects for the summer, watch the April Housing Market Index.

The fallout from housing seems to be hitting manufacturing especially hard. The slowdown in residential construction has reduced demand for construction machinery and other goods. Broader uncertainty among businesses about housing, along with other factors such as higher costs and slower profit growth, are curtailing capital spending.

March industrial output is expected to barely rise. Another surprise, like February's 0.4% jump in manufacturing output, would be reassuring that conditions may be on the mend. But a negative surprise could raise further doubts about a strong recovery for the economy in the second half of the year. If the weakness outside of consumers spending persists, it could begin to hurt hiring and cause consumers to stay away from the malls.

Here's the weekly lineup, from Action Economics.

MEETINGS OF NOTE

Monday, Apr. 16, 6:30 a.m. EDT

- Federal Reserve Bank of St. Louis President William Poole speaks about trade imbalances to the American European Community Association in Brussels.

8:45 a.m. EDT - Federal Reserve Bank of Philadelphia President Charles Plosser makes the opening remarks at the Global Interdependence Center's 25th Annual Monetary & Trade Conference at Drexel University in Philadelphia.

9:45 a.m. EDT - Federal Reserve Bank of Dallas President Richard Fisher speaks on fiscal issues and their economic impact at the Equipment Leasing and Finance Association's Financial Institutions Conference in Irving, Tex.

5:15 p.m. EDT - European Central Bank Governing Council member Christian Noyer speaks on "The EU Vision: From Maastricht to the Present and Beyond" at the Global Interdependence Center's 25th Annual Monetary & Trade Conference at Drexel University in Philadelphia.

RETAIL SALES - Monday, Apr. 16, 8:30 a.m. EDT

Retail sales growth picked up in March despite a poor month for auto sales. In February, sales ticked up just 0.1%, on a 0.9% jump in motor vehicle sales, after holding steady in January. Despite the softer February results, sales were up 3.2% from a year ago, compared to 2.2% in January.

The weekly chain store sales reports were upbeat for March, while the pace of vehicle sales slowed to an annual rate of 16.3 million, from 16.6 million in February. Elevated gasoline prices should also lead to a jump in gas station sales, after a 1.2% gain in February. Retail sales are measured in dollars and not in unit sales.

Sales excluding motor vehicles likely jumped 0.6%, according to economists surveyed by Action Economics. In February, sales outside of vehicles slipped 0.1% but held at a yearly pace of 3%. Some of the February weakness may have been related to inclement weather. For March, economists will be looking for rebounds in categories that did poorly in the prior month such as furniture stores, department stores, and building material and gardening retailers.

EMPIRE STATE MANUFACTURING SURVEY - Monday, Apr. 16, 8:30 a.m. EDT

The New York Federal Reserve Bank's survey of manufacturers is expected to rebound for April. The March index fell to a 22-month low of 1.9, from 24.4 in the prior month. Along with a decline in the overall reading, the new orders, shipments, and unfilled orders indexes also dropped. Manufacturers in the region appear to be completing many previously unfilled orders as the pace of new orders has slowed. The trend implies further deterioration in activity if new orders don't pick up.

Expectations for the coming six months slipped some but remained at a decent level. The general business conditions index cooled to 35.2, from 38.5 in February. The shipments reading climbed some more, to 45.4, from 42.2 in February, while the new orders, employment, and capital expenditures readings also brightened up a little.

And despite national employment data showing continued declines in factory payrolls, the New York Fed's March survey showed that manufacturers are also having more difficulty finding skilled workers, especially those with advanced computer skills.

BUSINESS INVENTORIES - Monday, Apr. 16, 10 a.m. EDT

Inventory growth probably picked up a little in February, after a 0.2% gain in January. However, it appears some businesses still feel a little uncomfortable with current inventory levels, especially given recent demand. In February, inventories of durable goods manufacturers grew 0.1%, the smallest gain in a year. Wholesalers may still have more work to do. Sales for wholesalers were weak outside of the 8.8% jump in the petroleum category. At the same time, inventories climbed by another 0.5%.

HOME BUILDERS SURVEY - Monday, Apr. 16, 1 p.m. EDT

The National Association of Home Builders and Wells Fargo bank will release its April Housing Market Index. The report measures housing market conditions by surveying builders' on current sales, buyer traffic through model homes, and expectations for sales during the next six months. Builders took a more cautious view of the market in March. The overall reading fell to 36, from 39 in February. A reading below 50 indicates that more builders view conditions as poor than good.

The index tracking expectations for the coming six months fell to 50, from 53 in February. The reading for current sales also dropped three points, to 37. And respondents reported a small decline in buyer traffic with a March reading of 28, from 29 the month before. The spring buying season is not getting off to a great start.

MEETINGS OF NOTE

Tuesday, Apr. 17, 6:30 a.m. EDT

- Federal Reserve Bank of Philadelphia President Charles Plosser speaks about the U.S. economic outlook to the Rutgers University School of Business in Cherry Hill, NJ.

9:10 a.m. EDT - European Commissioner for Economics and Monetary Affairs Joaquin Almunia gives the opening remarks at a New York Fed and European Commission conference entitled "The Euro and the Dollar: Pillars in Global Finance," in New York City.

10 a.m. EDT - The House Financial Services Committee holds hearings on "Possible Responses to Rising Mortgage Foreclosures" in Washington, D.C.

12 p.m. EDT - U.S. Treasury Deputy Secretary Robet Kimmitt speaks about the U.S.-Japan economic relationship in Washington, D.C.

12:30 p.m. EDT - Federal Reserve Bank of New York President Timothy Geithner gives a keynote speech at a New York Fed and European Commission conference entitled "The Euro and the Dollar: Pillars in Global Finance," in New York City.

5 p.m. EDT - European Central Bank President Jean-Claude Trichet gives the closing remarks at a New York Fed and European Commission conference entitled "The Euro and the Dollar: Pillars in Global Finance," in New York City.

ICSC-UBS STORE SALES - Tuesday, Apr. 17, 7:45 a.m. EDT

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ended Apr. 14. Sales grew a 0.9% for the week ended Apr. 7, after increasing 0.3% in the week ended March 31. The yearly pace of growth cooled off to 4%, from 4.9% for the week ended Mar. 31.

CONSUMER PRICE INDEX - Tuesday, Apr. 17, 8:30 a.m. EDT

The consumer price index probably picked up some steam in March on rising energy prices. Economists queried by Action Economics are forecasting a 0.6% increase. Gasoline prices kept climbing during March. The national average price for a gallon of conventional regular gasoline was $2.34 for the week ended Feb. 26, and rose to $2.54 in the week ended Mar. 26. Since then, gasoline prices have kept rising. On a yearly basis, consumer inflation rose to 2.4%, from 2.1% in January.

Minus food and energy, consumer prices probably rose 0.2% for a second straight month. Outside of energy, economists will also look to see if rents continued to climb at a brisk pace. Rents were up 4.6% from a year ago in February on ten straight monthly increases of 0.4%. The weak housing market has lifted demand for apartments as consumers opt to rent rather than buy.

The yearly pace of core inflation held at 2.7% for a second straight month in February. Stubborn core inflation is a big reason why the Federal Reserve continues to sound hawkish.

REAL EARNINGS - Tuesday, Apr. 17, 8:30 a.m. EDT

Inflation-adjusted weekly earnings of production workers probably held steady in March. That's based on the consensus forecast of a 0.6% gain in the March consumer price index and a 0.6% increase in average weekly earnings. Real earnings eased 0.3% for a second straight month in February as the consumer price index shot up on higher energy prices. Compared to the same period a year ago, inflation-adjusted earnings slowed to a 1.5% gain from 2.1% in January.

NEW RESIDENTIAL CONSTRUCTION - Tuesday, Apr. 17, 8:30 a.m. EDT

Housing starts probably eased some in March, after a solid rebound in February. Housing starts ran at an annual pace of 1.53 million in February, after sinking to a pace of 1.4 million in January. The January level was the weakest since August of 1997.

Further declines in the pace of housing starts are likely as the housing permit volume continues to fade. Permits fell to an annual rate of 1.53 million, from 1.57 million in January. The sharp pullback in new home construction is finally resulting in a slowdown of new home completions. The rate was 1.66 million in February, vs. 1.84 million in January. A further slowdown in completions will make it easier for builders to pare down the large amount of unsold homes builders are holding.

JOHNSON REDBOOK INDEX - Tuesday, Apr. 17, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the week ended Apr. 14. For the entire month of March, sales were up 0.9% compared to the same period in February.

INDUSTRIAL PRODUCTION - Tuesday, Apr. 17, 9:15 a.m. EDT

Industrial output probably edged up a little in March. Overall industrial production jumped 1% in February, driven in large part by a weather-driven 6.7% jump in utility output. February factory output rose 0.4%, after falling 0.5% in January.

A positive sign in the February report was the turnaround in business equipment output. Following a sharp 2.1% drop to start off the year, output grew 0.4% in February. This is a key category, as it gives a pretty good measure of business investment demand. Another solid rise would be reassuring as other data have pointed to weaker capital investment and increased caution among businesses.

The expected February uptick in industrial activity won't be enough to keep the capacity utilization rate from falling. In February, the rate went up to 82%, from 81.4%. Among manufacturers, the rate ticked up to 80.1%, from 79.9% in January. Right now, weaker demand and a quicker pace of capacity growth among manufacturers are putting some downward pressure on utilization rates. Capacity grew faster than output in the fourth quarter of last year and is on track to do so again in the first quarter of 2007.

MEETING OF NOTE - Wednesday, Apr. 18, 10 a.m. EDT

European Central Bank President Jean-Claude Trichet addresses the International Swaps and Derivatives Association meeting in Boston.

MORTGAGE APPLICATIONS - Wednesday, Apr. 18, 7 a.m. EDT

The Mortgage Bankers Association issues its weekly mortgage application volume data for home buying and refinancing activity during the week ending Apr. 13. For the week ended Apr. 6, the purchase index improved a little to 411.1, from 410.6 in the prior week. The refi index fell for a second straight week, to 2197.7, from 2208.6 for the week ended Mar. 30.

The four-week moving average for the purchase index grew for a fourth straight period, to 410.3, from 407.9. The four-week average for the refi index bounced back to 2238.2, from 2174.6, in the week ended Mar. 30. The average 30-year fixed-rate mortgage rose some more to 6.16%, from 6.13% in the week ended Mar. 30.

MEETING OF NOTE - Thursday, Apr. 19, 8:30 a.m. EDT

Federal Reserve Bank of San Francisco President Janet Yellen will speak about community development at the Greenlining Institute's Annual Minority Economic Development Conference in Los Angeles.

JOBLESS CLAIMS - Thursday, Apr. 19, 8:30 a.m. EDT

Jobless claims for the week ended Apr. 7 moved up some more, to 342,000. In the prior week, claims rose to an upwardly revised 324,000, from the originally reported 321,000. The four-week moving average rose to 323,250, from 316,250 in the week ended Mar. 31. Continuing jobless claims for the week ended Mar. 31 jumped to 2.53 million, from 2.49 million in the week ended Mar. 24.

LEADING INDICATORS - Thursday, Apr. 19, 10 a.m. EDT

The Conference Board's composite index of leading economic indicators most likely held steady in March. The February index posted a surprising 0.5% drop, after a 0.3% fall in January. The index was down 0.4% from a year ago in February for a second straight month, the first back-to-back yearly declines since 2001.

The index will get some support from a rebound in the average weekly hours worked by manufacturing employees. But that positive boost will be offset by a drop in stock prices in March. A further decline in consumer expectations will also weigh on the March reading.

PHILADELPHIA FED SURVEY - Thursday, Apr. 19, 12 p.m. EDT

The Philadelphia Federal Reserve Bank's April factory activity index for the mid-Atlantic region is expected to improve slightly. The index turned in another weak reading of 0.2 in March, after a falling to 0.6 in February, from 8.3 in January.

The news was mixed among the other indexes. The new orders, shipments and employment indexes improved in March, although it looked like softer demand in recent months left manufacturers plenty of time to complete formerly unfilled orders. Attitudes among respondents remain cautiously optimistic for the coming couple quarters. The general business activity index for the coming six months slipped a little.

MEETING OF NOTE

Saturday, Apr. 20, 2 p.m. EDT

- U.S. Treasury Secretary Henry Paulson gives a keynote speech on China at the Committee of 100's 16th Annual Conference in New York City.

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