RTTNews - Most economic readings released last week were positive, adding to evidence that economic stabilization may be around the corner. Economists unequivocally support expectations for a strong third quarter rebound. Some of them are even warming to the idea that growth will far exceed market expectations, given positive data points from the labor and housing markets. The only issue that lacks clarity is whether the anticipated growth could become sustainable.

Final demand can hold up beyond this year, only if the labor market continues to improve. Industrial production is expected to see an upswing in the coming quarters, as the gap between production and demand narrows. Therefore, the rate of lay-offs should slowdown and take employment towards growth in early 2010.

The housing market is seeing stabilization, as reflected by recent positive data points from the sector, with the improvement from the dire state coming as a result of a sharp decline in prices, lower mortgage rates and slightly better sentiment. An improvement in home sales bodes well for construction activity due to the former's role as a leading indicator for construction.

Auto sales received a lift from the cash-for-clunkers program, with sales rising to a seasonally adjusted annual rate of 11.3 million in July from 9.7 million in June. The resounding success of the program led to the using up of the initial $1 billion funding set aside for the program. According to estimates by Danske Bank, the rebound in car sales alone can lift GDP by 1 to 1.5 percentage points in the coming two quarters.

Among the economic reports released last week, the ISM's report on manufacturing showed that its purchasing managers' index rose to 48.9 in July from 44.8 in June, with the latest month's reading marking the highest since August 2008. The new orders index climbed above 50 to 55.3 from 49.2 and the backlog of orders index rose 2.5 points to 50. On a positive note, the employment index rose about 5 points to 45.6. Despite a 2.7 point-increase, the inventories index is still at depressed levels at 33.5, while the prices paid index rose 5 points to 55.

However, the ISM's non-manufacturing index fell to 46.4 in July from 47 in June. The business activity index declined 4 points to 42 and the new orders index moved down 0.5 points to 48.6, while the prices paid and the employment index dropped 1.9 points and 12.4 points, respectively.

Jobs reports relayed comforting news. Initial jobless claims came in at 550,000 in the week ended August 1st, down from 588,000 in the previous week. However, continuing claims rose by 69,000, which is evidence that labor market conditions remain tough. The monthly non-farm payrolls survey revealed that jobs fell by a much smaller-than-expected 247,000 in July and the previous two months' numbers were revised up by a net 43,000. The pace of payroll declines in the manufacturing and the services sector slowed down considerably. The jobless rate fell due to a decline in the labor force rather than an increase in employment and therefore poses a risk of reversal in the future.

Last week, the Commerce Department said factory goods orders report showed a 0.4% month-over-month increase in June, with non-durable goods orders rising 2.7%, while durable goods orders were revised to show a 2.2% decline compared to the 2.5% decline estimated earlier.

A separate report released by the Commerce Department showed that construction spending report showed a 0.3% increase in the spending for July. Public construction spending climbed 1%, helping to offset a 0.1% drop in private construction spending. Single-family construction rose for the first time in 40 years, while multi-family construction declined again. In the private category, non-residential construction declined 0.5%.

Personal income declined 1.3% in June following a 1.3% increase in May, according to a report released by the National Association of Realtors. At the same time, personal spending climbed 0.4%, one-tenth of a percentage point more than what economists had expected. Taking away the impact of stimulus spending, personal income was down a mere 0.1%. Notwithstanding a 0.4% increase in personal spending, real spending declined 0.1%. The personal savings rate declined to a 4.8% rate from a revised 6.2% in May.

Meanwhile, the National Association of Realtors said pending home sales climbed 3.6% month-over-month in June. Economists had estimated a mere 0.7% increase. The measure indicates contract signings and is a leading indicator for existing home sales. The gains were much pronounced in the South and West, which saw a significant number of foreclosure sales.

The unfolding week is a busy one on Main Street, with a few first tier reports along with the announcement of the FOMC decision due for the week. Among the economic reports, the Commerce Department's retail sales report for July, the Federal Reserve's industrial production report for July, the University of Michigan's preliminary reading of the consumer sentiment index for August and the weekly jobless claims report are likely to be closely watched by traders.

Also on tap are the Commerce Department's trade balance report for June, the Labor Department's import and export prices index for July, the Commerce Department's wholesale and business inventories reports for June, the preliminary second quarter productivity and costs report, the consumer price inflation report for July and the treasury budget for July. The results of the Treasury auctions of 3-year note, 10-year note and 30-year bond auctions, scheduled for Tuesday, Wednesday and Thursday may also move the markets.

The Fed's interest rate decision is going to be a non-event, given the limited scope the Fed has at its disposal to rev up growth using its key policy rate. However, the focus will be on whether the central bank will expand its purchase program. Only last week, the Bank of England announced an increase in the size of its asset purchase program, suggesting that the U.K. economy is still in the danger. Going by the Fed's recent preoccupation on exit strategies, Danske Bank believes that neither an increase in the size of the program nor an extension in the schedule of the program is likely.

The retail sales report for July is likely to reflect the positive impact of the cash-for-clunkers program. There, the headline number is expected to sport a decent look, although sales excluding autos are expected to show only a modest gain.

Meanwhile, the weekly jobless claims report is likely to show a drop in claims for another week, in-line with the recent declining trend. After seeing a severe downtrend for about 18 months now, industrial output declines should moderate going forward, as signaled by a rise in the ISM's manufacturing purchasing managers towards the '50' cut-off mark in July. Additionally, easy comparisons for auto production are likely to support production in July, lifting it into positive zone in the month.

Monday

There are no important economic reports due out 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 on Tuesday. The consensus estimates call for a 5.4% increase in non-farm productivity, but a 2.4% decline in unit labor costs.

In the first quarter non-farm productivity rose at an upwardly revised 1.8% quarter-over-quarter rate and unit labor costs climbed 2.7%. The consensus estimates had called for a 1.2% increase in non-farm productivity and 2.9% growth in unit labor costs.

The improvement in productivity reflected an 8.8% drop in hours, which more than offset the 7.2% decline in output. Hourly compensation rose 4.5% quarter-over-quarter.

The Commerce Department is due to release its wholesale inventories report at 10 AM ET on the same day. Economists expect wholesale inventories at the end of June to show a 0.9% decline.

Wednesday

The trade gap data for June is due out at 8:30 AM ET on Wednesday. Economists estimate that the trade gap widened to $28.5 billion in the month. The trade gap measures the difference between imports and exports of both tangible goods and services.

In May, the U.S. trade deficit unexpectedly narrowed, as the value of exports showed a notable increase and the value of imports edged lower. The trade deficit narrowed to $26.0 billion in May from a revised $28.8 billion in April. Economists had been expecting the deficit to widen to $30.0 billion from the $29.2 billion originally reported for the previous month.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended August 7th at 10:30 AM ET on the same day.

The oil inventory report for the week ended July 31st showed that crude oil stockpiles rose by 1.7 million barrels to 349.5 million barrels and remained above the upper half of the average range.

However, gasoline and distillate fuel inventories declined by 0.2 million barrels and 1.1 million barrels, respectively in the week ended July 31st. Notwithstanding the decline, gasoline inventories were in the upper half of the average range and distillate inventories were above the upper half of the average range. Refinery capacity utilization averaged 85.7% over the four weeks ended July 31st compared to 86.3% 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 on the same day. The budget is considered as an indicator of budgetary trends and the thrust of fiscal policy. Economists estimate a deficit of $180 billion for July.

The Federal Reserve Open Market Committee is scheduled to make an announcement regarding its near-term direction of monetary policy 2:15 PM ET on Wednesday. The Federal Open Market Committee consists of seven Governors of the Federal Reserve Board and five Federal Reserve Bank Presidents.

In June, the FOMC decided along the expected lines, opting to hold interest rates unchanged at 0%-0.25%. The central bank did not make any changes to its qualitative easing measures, instead suggesting that as previously announced, it will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. The Fed also will be buying up to $300 billion of Treasury securities by autumn.

On economic conditions, the central bank noted that the pace of contraction has been slowing. The Fed also observed that financial market conditions have improved. While constrained by job losses, lower housing wealth and tight credit, household spending has been showing signs of stabilization. The central bank said firms have been successful in bringing inventories in line with sales, although they are continuing to reduce fixed investment and workforce.

The FOMC expressed confidence that concerted policy actions will lead to the resumption of a sustainable recovery due to concerted policy actions. The committee also said it expects inflation to remain subdued for some time due to substantial resource slack.

Thursday

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 Thursday. For July, economists estimate a 0.7% increase in the retail sales and a 0.1% climb in retail sales excluding autos.

Retail sales rose 0.6% month-over-month in June, the same pace of increase as in the previous month. Economists had expected a 0.4% increase in retail sales. Excluding autos, retail sales were up 0.3%, slightly lower than the 0.4% increase in May and also lower than the 0.5% growth expected by economists.

The increase in the headline number reflected a 2.3% increase in sales of motor vehicle & parts, a 5% jump in gasoline sales. On the other hand, most of other categories showed softness.

The Labor Department is due to release its customary jobless claims report for the week ended August 8th at 8:30 AM ET. Economists expect a modest slippage in claims to 545,000.

First-time claims for unemployment benefits showed a much bigger than expected decrease in the week ended August 1st, with the data likely to offset some of the recent concerns about the outlook for the labor market.

The report showed that initial jobless claims fell to 550,000 from the previous week's revised figure of 588,000. Economists had been expecting jobless claims to edge down to 580,000 from the 584,000 originally reported for the previous week. However, the continuing claims for the week ended July 25th rose 69,000 to 6.31 million.

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 on the same day.

Import prices rose 3.2% month-over-month in June compared to an upwardly revised 1.4% growth in the previous month. The increase reflected a 20.3% increase in petroleum import prices, while non-petroleum import prices were up a mere 0.2%. On a year-over-year basis, import prices were down 17.4%.

Export prices rose at a 1.1% rate in June compared to a downwardly revised 0.5% growth in May. Agricultural export prices climbed 4.8% compared to 0.8% growth in export prices of non-agricultural commodities. On a year-over-year basis, export prices declined 6.4%.

The Commerce Department is scheduled to release its business inventories report for June 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 0.9% decline in business inventories for the month.

Business inventories at the end of May were down 1%, slightly steeper than the 0.8% decline expected by economists. Inventories declined for the ninth straight month. Meanwhile business sales eased 0.1%, with the inventory to sales ratio declining to 1.42 in May from 1.43 in the year-ago period, marking the lowest level since October 2008.

Friday

The consumer price index for July 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 a flat headline consumer price index and a 0.1% rise in the core consumer price index that excludes food and energy.

Consumer prices climbed 0.7% in June compared to the previous month. Economists had projected an advance of about 0.6%.

Annually, consumer prices were down 1.4%. This was the largest year-over-year decline since 1950. Core prices, which exclude the volatile food and energy sectors, advanced 0.2% compared to the previous month. Economists had expected an increase of 0.1%.

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 rose 0.4% in July, while capacity utilization is expected to come in at 69%.

Industrial output fell 0.4% in June compared to the previous month, which was better than the 0.6% drop expected by economist. The decline marked the seventeenth drop in eighteen months. Annually, output is down 13.6%. Manufacturing output fell 0.5%, with auto-related production dropping 2.7%, while the rest of the manufacturing sector showed a smaller 0.4% decline. Capacity utilization fell two-tenths to 68% in June.

The Reuters/University of Michigan's preliminary report on the consumer sentiment index for August is scheduled to be released at 9.55 AM ET on the same day. Consumer sentiment is expected to rise to 69 from the previous month's reading of 66.

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