RTTNews - Consumer spending, which makes up a significant proportion of the GDP, remains the sore spot even as the other sectors are showing an improvement from depressed levels. Despite the slowdown in the lay-offs, hiring has not picked up, as cost conscious companies in their bid to boost their bottom line are prudently reviewing their spending patterns in order to prioritize spending. Businesses are unlikely to increase their hiring until they are presented with evidence of a rebound in sales and a rise in order backlogs. This scenario does not bode well for consumer spending.

That said, a rebound in economic conditions is in the cards, as industrial production is set to rebound and an inventory replenishment drive is likely to begin. The mere 0.2% decline in final sales, which are GDP less inventory additions, in the second quarter has prompted many economists to be sanguine about a recovery. UBS economists said they expect the pace of inventory liquidation in recent quarters to be unsustainable and less inventory disinvestments will likely boost growth in the second half of the year.

Even amid all these fledgling hopes, expectations are muted. The International Monetary Funds said in a report it is of the view that the recession in the U.S. seems to be ending. That said, the agency said financial strains are still elevated and a recovery is likely to be gradual and expects the potential U.S. growth to stay 'well below' the past trends.

The demand side equation is still murky, and the inventory replenishment theory will hold good only if demand abroad as well as domestically improves. The tidings from Asia seem to be encouraging enough to bring a smile on the face. Massive stimulus packages and extremely accommodative monetary policy helped most economies in the region that had slipped into negative growth in the first quarter to return to positive growth in the second quarter. Even if the impact of the stimulus measures wears off, the growth is sustainable, as monetary policy actions act with a lagged effect.

However, growth is unlikely to return to pre-crisis levels, as most economies in the region are heavily reliant on exports to industrialized nations, which are still besieged with problems in the financial sector.

The first estimate of U.S. second quarter GDP was mixed. The GDP for the quarter showed a smaller-than-expected decline of 1% compared with a 1.5% drop predicted by economists. However, personal consumption expenditure fell by 1.2%, steeper than the 0.5% contraction estimated. Inventories deducted 0.8 percentage points from GDP growth, but the deduction was not as worse as the 2.4 percentage point deduction in the first quarter. Net exports added 1.4 percentage points to GDP growth compared with 2.6 percentage points in the previous quarter.

Net-net inventories are poised for a rebound and trade is likely to continue to show improvement. The sore spot may be consumer spending, which is remaining intransigent despite the stimulus measures and a semblance of stabilization dawning in the horizon.

The revisions to prior period data show that GDP peaked a year-ago and then went about declining in all the subsequent quarters, which makes the contraction the deepest in the post world war II era.

The housing market reports were benign, showing a continued improvement in conditions towards stabilization. Last week's new home sales report showed that new home sales rose 11% to a seasonally adjusted annual rate of 384,000 units in June. A 23% month-over-month increase in sales in the West can be explained by the $8,000 federal tax credit awarded to first time buyers and the $10,000 California tax credit for new homes. The median sales price of new homes fell 12% year-over-year to $206,200, while inventories, as measured by the months' supply of new homes at current sales rate, fell to 8.8 from 10.2 in the previous month.

The S&P Case/Shiller survey revealed that the 20 city composite home price index declined 17.06% year-over-year in May compared to expectations for a 17.9% drop. However, on a monthly basis, the index rose for the first time since Jul 2006.

Signaling that consumer sentiment is still fragile, given the fluid economic conditions, the Conference Board said its consumer confidence index for July declined to 46.6 from 49.3 in June. Economists had expected a more modest decline to 49. The present situation as well as the expectations index declined. Much of the negativity was due to the difficult job market situation.

Initial claims for unemployment benefits totaled 584,000 in the week ended July 25th to 584,000. The previous week's figures were revised up by 5,000 to 559,000. The week was the first one in recent times, where the numbers weren't influenced by seasonal distortions brought about by the differing time schedules of auto plant shutdowns. Continuing claims for the week ended July 18th fell 54,000.

Meanwhile, the Chicago purchasing managers' index came in at 43.4 in July, almost in line with the expected reading of 43, but higher than 39.9 in June. The July reading marked the highest level since September 2008. While the new orders index rose 6.4 points to 48, the index of order backlogs fell 5.5 points to 32.1. Inventories slipped to 25.4, its lowest level since 1949, from 34.2 in June. At the same time, the employment index climbed 6.4 points to 35.3.

The monthly non-farm payrolls report for July and the manufacturing and services sector survey reports of the ISM are the key reports that traders are likely to closely watch in the unfolding week. Additionally, the Commerce Department's construction spending report for June, the National Association of Realtors' pending home sales report for June, the Bureau of Economic Analysis' personal income and spending report for June and the customary weekly jobless claims and oil inventory reports may also be of interest to traders.

Some degree of attention is likely to be vested on the auto sales due to be reported by individual automakers after Ford seem to have suggested that it may have experienced the first annual gain in 2 years in July, benefiting from the government's 'cash for clunkers' program. The treasury auction of 3-year and 10-year notes and 30-year bonds are the other prominent events in the economic calendar of the unfolding week.

The ISM's manufacturing purchasing managers' index is expected to rise again in July, although it is unlikely to have crossed the cut-off mark of '50' that delineates expansion and contraction. The services sector survey may also show similar results. State Street expects the manufacturing and non-manufacturing purchasing managers' indexes to rise into the high 40s, with both expected to converge on 50 over the next few months.

With the cumulative job losses in the recent recession at about 6.5 million over an 18-month span, each of which saw declines, we can expect a moderation in the pace of job losses, which characterized the four months preceding June. That said, it is a certainty that the economy lost jobs again in July and the employment rate will tick up further.

The personal income and spending report is expected to show a payback from the previous month's gains built on the back of transfer payments from the American Recovery and Reinvestment Act. The rate of increases in wages and salaries is also likely to slow due to a fall in the number of hours worked. Although personal spending is likely to show a modest growth, real consumer spending may show a drop.

Monday

Individual automakers will report their sales, comprising unit sales of domestically produced cars and light duty trucks on Monday.

The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET on the same day. Economists expect the index to show a reading of 46.5 for July.

The index of manufacturing activity rose for the sixth straight month to 44.8 in June, up about 2 points from May. Economists had expected a reading of 44.6. The new orders index dipped 2 points to 49.2, dropping below the 50 mark once again, and the orders backlog index eased to 47.5. On the other hand, the production index rose 6.5 points to 52.5. On a positive note, the employment index climbed 6.4 points to 40.7.

The Commerce Department's construction spending report to be released at 10 AM ET on Monday is expected to show a 0.6% decline in spending for June.

In May, construction spending declined 0.9% month-over-month, with private construction spending and public construction spending dropping 1% and 0.6%, respectively. Among private residential construction, spending on single-family construction declined for the 39th consecutive month, dropping 4.5% compared to a 9.6% drop in multi-family construction spending. At the same time, private non-residential construction rose 0.5%.

Tuesday

The Bureau of Economic Analysis is due to release its personal income & outlays report for June on Tuesday. Economists estimate the report, which is due out at 8:30 AM ET, to show that personal income declined 1% and the personal spending increased 0.3% in the month.

In May, personal income climbed 1.4% month-over-month following an upwardly revised 0.2% increase in April. Disposable income climbed 1.6%. Consequently, the personal savings rate also rose to 6.9%. However, after the special factors were stripped, disposable income was up just 0.2%. At the same time, personal spending rose 0.3%, in-line with expectations. The personal consumption expenditure index rose at a 0.1% monthly rate and was up 1.8% annually.

Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET on the same day. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. Economists estimate a 0.3% increase in the pending home sales index for June.

Pending home sales rose 0.1% month-over-month in May and thee previous month's gain was revised up to 7.1% from the initially reported 6.7% increase.

Wednesday

The ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 AM ET on Wednesday. The report is usually released two days prior to the Labor Department's employment report. The private sector is expected to have lost 340,000 jobs in July.

The Commerce Department is due to release its report on factory goods orders for June at 10 AM ET on the same day. Orders for manufactured goods are likely to have increased 0.5% in the month.

Durable goods orders, which make up the bulk of the factory goods orders, showed a 2.5% monthly decline in June. Excluding transportation orders, orders rose 1.1%. Economists had been looking for a mere 0.8% decline in headline orders and flat order growth excluding transportation. Non-defense capital goods orders, excluding aircraft orders, rose 1.4% in June, adding to the 4.3% gain in May.

Annually, the metric is down 21.1%. Shipments of this category of goods, which go directly into GDP calculations, edged up 0.1% month-over-month. The report is a confirmation that the economy is moving towards stabilization.

The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM ET on the same day. The non-manufacturing index is likely to show a reading of 48 for July.

The non-manufacturing index rose to 47 in June from 44 in May. The index is now at its highest level since September 2008. While the new orders index rose to 48.6 from 44.4 in May, the backlog of orders index climbed 6 points to 54.5. The employment index also climbed, rising 4.4 points to 43.4. On a very positive note, the export orders index rose 7.5 points to 54.5. Meanwhile, the prices paid index rose about 7 points to 53.7, mitigating deflationary fears.

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

Crude oil stockpiles rose by 5.1 million barrels to 347.8 million barrels in the week ended July 24th. Crude oil inventories remained above the upper bound of the average range for this time of the year.

Distillate stockpiles rose by 2.1 million barrels and remained above the upper boundary of the average range. However, gasoline inventories fell by 2.3 million barrels, although they remained in the upper half of the average range. Refinery capacity utilization averaged 86.3% over the four weeks ended July 24th compared to 86.9% in the previous week and 88.9% in the year-ago period.

Thursday

The Labor Department is due to release its customary weekly jobless claims report for the week ended August 1st at 8:30 AM ET Thursday.

First-time claims for unemployment benefits rose 25,000 to 584,000 in the week ended July 25 from the previous week's upwardly revised reading of 559,000. Economists had estimated claims to have increased to 575,000 in the recent reporting week from the initially reported 554,000 for the previous week.

The four-week moving average fell 8,250 to 559,000. The report also showed that continuing claims, which is calculated with a week's lag declined 54,000 in the week ended July 18th.

Friday

The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM on the Friday. The report sheds light on the number of paid employees working part time or full time in the nation's business and government establishments, the number of hours worked in the non-farm sector, the basic hourly rate for major industries and the number of unemployed as a percentage of the labor force. Economists estimate that the U.S. economy lost 333,000 jobs in July and look for an unemployment rate of 9.6%.

Non-farm payroll employment fell by 467,000 in June 345,000 jobs in May following a downwardly revised decrease of 322,000 jobs in May. Economists had expected a decrease of about 365,000 jobs compared to the decrease of 345,000 originally reported for the previous month.

The continued decrease in jobs reflected declines in employment in both the good-producing and service-providing sectors. While goods-producing sectors lost 223,000 jobs, service-providing sectors lost 244,000 jobs.

At the same time, the Labor Department said that the unemployment rate edged up slightly to 9.5% from 9.4% in May. The rate came in lower than the 9.6% rate expected by economists.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET on the same day. Consumer credit for June is likely to show a decline of $4.1 billion.

Consumer credit declined by $3.2 billion to $2.519 trillion in May, with the decline much smaller than the $5.6 billion drop expected by economists. The bulk of the decline was in revolving credit, which declined by $2.9 billion, while non-revolving credit declined by a more modest $400 million.

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