The economy appears all set to traverse on a slow painful path towards recovery following two quarters of severe downward adjustments. Economic numbers have been reassuring, with most of them coming in less bad than feared. The monthly employment report showed a 539,000 decline in non-farm payrolls in April, which is smaller than the 600,000 job losses estimated by economists. Not too many are impressed by the numbers.

The job numbers were supported by a 72,000 increase in government employment, which benefited from hiring related to the 2010 census. Wachovia Securities pointed to the fact that even the smaller-than-expected job loss in April translated into an annual job loss of about 6.5 million jobs. More than a reduction in layoffs, what is more important for a recovery is stronger job growth, which could take more time to materialize. Businesses usually attempt to get more output of their existing workforce, thereby increasing productivity and in turn profits, which normally give them the leeway to hire.

A Labor Department report said last week that non-farm productivity rose 0.8% in the first quarter following a 0.6% drop in the fourth quarter. The improvement in productivity reflected a 9% drop in hours, which more than offset the 8.2% decline in output. Hourly compensation rose 4.1% quarter-over-quarter compared to a 3.3% increase in unit labor costs.

Meanwhile, in another encouraging sign, the National Association of Realtors reported that the pending home sales index for March rose 3.2% month-over-month, with the gains more pronounced in the high foreclosure areas of the South and the West. At the same time, the Northeast and the Midwest showed declines.

Construction spending edged up 0.3% month-over-month in March, marking the first increase in six months. The gain came amid a 1.1% increase in public construction, while private construction spending eased 0.1%. In the private construction category, spending on single-family home construction slumped 8.6% and multi-family home construction spending dropped 1.1%. Meanwhile, private non-residential construction spending rose 2.7% compared to the previous month. March's unexpected gain could lead the government to revise up its first quarter advance GDP estimate.

In another economic release, the Federal Reserve said consumer credit fell by $11.1 billion, much bigger than the expected decline of $4 billion. Consumer credit has been on the decline for six of the past eight months.

More importantly, the past week's key event was the release of bank stress results, which was released on Thursday evening. The stress test results revealed that nearly all of the 19 banks have enough Tier 1 capital to absorb the higher losses even under a hypothetical adverse scenario. However, it was found that roughly half of the firms need to enhance their capital structure to put emphasis on common equity. The government's tests showed a cumulative $74.6 billion in capital would have to be raised for the ten banks that need to raise money.

About nine banks were found to have adequate capital and those banks that need capital were given the option to convert the preferred shares held by the Treasury to common shares to satisfy the additional capital requirements. Despite the view that the stress test results did not paint a bleak picture, as the additional capital requirement specified do not appear particularly burdensome, IHS Global Insight noted that credit markets still remain under severe pressure and are a long way from functioning normally.

The unfolding is fairly hectic week on the economic calendar, with a few key first-tier releases such as the Commerce Department's retail sales report for April, the New York Fed's Empire manufacturing survey for May and the Federal Reserve's industrial production report for April scheduled to be released during the week.

Additionally, traders may focus on the University of Michigan's consumer sentiment index for May, the Labor Department's consumer and producer price inflation reports for April, the weekly jobless claims report and the Commerce Department's trade balance report for March. Apart from these reports, market participants may also pay attention to the Fed speeches scheduled to be delivered during the week, the Labor Department's import and export prices for April and the Commerce Department's business inventories report for March.

In April, retail sales may have benefited from strong performances by discount and drug stores, as consumers seek bargains to meet their pent-up demand. Gasoline prices also perked up in April relative to the previous month. However, motor vehicles sales could see continued weakness. The report assumes importance because bottoming of retail sales along with a reduction in business inventories are important preconditions to a recovery.

Industrial production for April could show a decline, although the rate of decline is likely to see a slowdown. The regional and the national manufacturing surveys confirmed the same thinking. Capacity utilization is also likely to remain weak, with the lower utilization expected to hurt corporate profits in coming quarters due to the fact that manufacturers' pricing power will mostly be eliminated.

The trade balance report is likely to show the first widening in deficit since July, as higher oil prices should push up import bill and the decline in import volumes will slowdown. Also, exports may also see a show a small retreat. IHS Global Insight believes that the trade deficit is likely to continue to widen over the rest of the year, as the U.S. economy revives sooner than most of its trading partners as a result of which imports revive before exports.

Monday

Federal Reserve Chairman Ben Bernanke is scheduled to deliver a keynote address at the Atlanta Fed's Financial Markets Conference in Jekyll Island in Georgia at 6:30 PM ET.

Tuesday

Atlanta Federal Reserve Bank President Dennis Lockhart is due to deliver opening remarks at the Atlanta Fed's Financial Markets Conference in Jekyll Island, Georgia on Tuesday, and closing remarks at noon on May 13. Boston Fed President Eric Rosengren and Atlanta Fed Governor Elizabeth Duke will each moderate panel discussions on May 12 and 13, respectively at 8:20 AM ET.

The trade gap data for March is due out at 8:30 AM ET on Tuesday. Economists estimate that the trade gap widened to $29.2 billion in the month. The trade gap measures the difference between imports and exports of both tangible goods and services.

In February, U.S. trade deficit narrowed to $26 billion from a revised deficit of $36.2 billion in January. Economists had estimated a widening in the deficit to $36.5 billion in the month from the originally reported deficit of $36 billion for January.

The narrower deficit reflected a drop in imports. The February exports were up $2 billion to $126.8 billion, while imports fell $8.2 billion to $152.7 billion. The goods deficit fell $10.1 billion to $36.9 billion and the services surplus rose $0.2 billion to $10.9 billion.

The Treasury Budget, a monthly account of the surplus or deficit of the federal government is scheduled to be released at 2 PM ET on the same day. Economists expect the budget for April to show a deficit of $63 billion.

Wednesday

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 a 0.1% decline in the retail sales for April, while they estimate that retail sales, excluding autos, remained unchanged in the month.

Retail sales fell 1.1% month-over-month in March following an upwardly revised 0.3% increase in February. Economists had estimated a 0.3% increase for March.

Sales, excluding autos, fell 0.9% in March, reversing the downwardly revised 0.2% growth in the previous month. Economists had estimated retail sales, excluding autos, to have remained unchanged in the month. Sales at motor vehicle & part dealers fell 2.3% compared to the previous month and they declined 23.5% from the year-ago period.

Sales at electronics & appliance stores fell 5.9% compared to a 0.7% increase in the previous month. Sales at gasoline station sales slipped 1.6% compared to a 3.1% increase witnessed in the previous month.

The export & import price indexes for April, 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 the same day.

In March, import prices rose 0.5% from a revised 0.1% decline in the previous month. The increase reflected a 10.5% increase in petroleum import prices. On a year-over-year basis, import prices were down 14.9%.

Export prices fell at a 0.6% rate in March compared to a 0.3% decline in February. Agricultural export prices fell 3.5% compared to a 0.3% decline in export prices of non-agricultural commodities. On a year-over-year basis, export prices declined 6.7%.

The Commerce Department is scheduled to release its business inventories report for March at 10 AM ET on the same day. The report summarizes the results from the monthly retail trade, wholesale trade and factory goods orders surveys. The report is expected to show a 1.1% decline in business inventories for the month.

Business inventories at the end of February were down 1.3% compared to the previous month, a slightly bigger drop compared to expectations for a 1.2% decline. Meanwhile, business sales edged up 0.2%. Annually, business inventories at the end of February declined 3.5%, while business sales for the month were down 13% compared to the previous year. The total business inventories to sales ratio was 1.43 in February compared to 1.29 in the year-ago period.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on the same day.

The report for the week ended May 1st showed that crude oil inventories, excluding those in the Strategic Petroleum Reserve, rose by 0.6 million barrels to 375.3 million barrels. Inventory levels of crude oil were above the upper bound of the average range for this time of the year.

Gasoline stockpiles fell by 0.2 million barrels, but they were above the upper boundary of the average range. Meanwhile, distillate inventories rose by 2.4 million barrels and were above the upper boundary of the average range. Refinery capacity utilization averaged 83% over the four weeks ended May 1st compared to 82.1% in the previous week.

Thursday

The U.S. Labor Department is scheduled to release a report on the producer price index for April at 8:30 AM ET on Thursday. The index measures the average change over time in the prices received by domestic producers of goods and services. Economists expect the headline index and the core index for April to show unchanged readings.

Producer prices fell 1.2% in March following 0.1% growth in February, while the core producer price index remained unchanged. Economists had expected the headline index to show an unchanged reading and the core reading to show 0.1% growth.

Food prices fell 0.7% compared to a 1.6% decline in the previous month. Energy prices declined 5.5% following a 1.3% increase in the previous month. On a year-over-year basis, the producer price index fell an unadjusted 3.5%. Inflation pressures in the pipeline continued to wane, as intermediate food and energy prices slid 0.5% and 6.3%, respectively.

The Labor Department is due to release its customary weekly jobless claims report for the week ended May 9th at 8:30 AM ET on the same day.

Initial claims for unemployment benefits fell to 601,000 for the week ended May 2nd, down 34,000 from the previous week's revised figure of 635,000. Economists expected claims to increase to 635,000 from the originally reported figure of 631,000 for the previous week.

The 4-week moving average for initial claims, a statistic that flattens out week-to-week fluctuations, declined 14,750 to a level of 623,500. The number of people receiving ongoing unemployment help, a statistic known as continuing claims, increased 56,000 to a level of 6.351 million in the week ended April 25th.

Friday

The consumer price index for April is scheduled to be released at 8:30 AM ET on Friday. 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 an unchanged reading for the consumer price index and a 0.1% rise in the core consumer price index that excludes food and energy.

In March, consumer prices fell 0.1% following a 0.4% increase in February. Core consumer prices, excluding food and energy, rose 0.2%, the same pace as in the previous month. Economists had expected a 0.1% increase in both consumer prices and core consumer prices.

Transportation prices had the largest downward influence on the headline number, as it declined 1.1% in March, reversing the 1.9% gain in the previous month. Apparel prices eased 0.2% following a 1.3% advance in February. Prices of other goods and services also rose at a faster pace of 2.7% in March.

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 the same day. The headline general business conditions index for May is expected to come in at -15.

Manufacturing conditions in New York deteriorated in April, but at a much slower rate than in recent months. The general business conditions index climbed 24 points to -14.7 in April. Economists expected a modest improvement in the index to -35.

The new orders index jumped 41 points to a reading just below zero, while the shipment index rose 25 points. The employment indexes remained negative despite an improvement. The future indexes improved significantly, with the future general business conditions, new orders and shipment indexes rising sharply to levels not seen since September of last year.

The Treasury Department is due to release a report on the flows of financial instruments into and out of the U.S. for March at 9 AM ET on the same day.

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 declined 0.6% in April, while capacity utilization is expected to come in at 68.9%.

Industrial production showed a bigger-than-expected drop in March. Machinery production fell by 4.2%, computers/electronics output declined by 2.5% and mining output contracted by 3.2%, which together offset the impact of a 1.5% rise in auto and parts production and a 1.8% increase in utilities output. Capacity utilization dipped to 69.3% from 70.3% in the previous month, with the recent month's reading marking a record low.

The Reuters/University of Michigan's preliminary report on the consumer sentiment index for May is scheduled to be released at 10 AM ET on Friday. Consumer confidence is expected to remain almost flat in the month, with economists forecasting a marginal decline in the index to 65 from 65.1 in the previous month.

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