RTTNews - It may be a long time before the murky picture gains come clarity. Although some recent reports are increasing hopes that the economy may soon stabilize, no single number has definitely pointed towards a recovery. The past week was no exception, throwing in a mixed bag of numbers. Housing reports came in better than expected, although they were mostly concerned with new homes, while industrial production continued to dip. Retail sales suggested anemic levels of consumer spending, with the headline number showing some strength due to higher gasoline and auto sales from very depressed levels.
One ray of hope for the economy is the replenishment of depleted inventories. Companies have been systematically pruning inventories to bring them in line with demand. Restocking should stoke production and in turn build up the tempo that could take the economy on the recovery path after being in the dumps for almost a year and a half.
However, the sore point is that the final demand is unlikely to see an improvement. This was very evident from the June retail sales report, which showed that core retail sales, which exclude motor vehicle sales, gasoline and building materials, fell 0.1% in June after declining at a 2.7% annual rate in the second quarter. Growth, which is not supported by an improvement in final demand is unlikely to be sustainable and faces the risk of tapering away.
Capping a week of optimism concerning a recovery, the housing starts report for June showed a 3.6% increase in starts to 582,000, marking the highest level since November 2008. The previous month's data was revised up by 30,000. The June report showed an increase in single-family starts, while multi-family starts continued to decline. Although housing starts improved in the month, they are way off their peak of 2.27 million units recorded in January. Notwithstanding the optimism, one has to take cognizance of the fact that existing home sales make up the bulk of the housing market and therefore, they have a more important role to play in inventory correction.
The National Association of Homebuilders revealed that the housing market index rose 2 points to 17 in July compared to 15 in June, with the July reading marking the best since September 2008. The present conditions index rose 3 points, while the future expectations index remained unchanged. The index of prospective buyer traffic edged up a point.
In line with recent positive job market readings, initial jobless claims for the week ended July 11th fell sharply to 522,000 from 569,000 in the previous week. Peter Boockvar from Miller Tabak noted that claims were skewed lower artificially, as the usual July auto plant shutdowns are unlikely, given GM and Chrysler have already shut down plants following their bankruptcy filing. The four-week average also slid in the week. Continuing claims for the week ended July 4th also fell to 6.273 million, marking the lowest level since April 10th.
Manufacturing sector readings were mixed. The Philadelphia Fed's manufacturing survey showed that the business activity index fell to -7.5 in July from 2.2 in June. The employment index declined by 3.5 points to -25.3, while the inventories index was little changed at -15.4. Despite new orders and order backlogs indexes improving from month-ago levels, they still remain negative. The 6-month outlook index fell to 51.9 in July from 60.1 in June.
Meanwhile, conditions in the manufacturing sector in the New York region contracted at a slower pace in July, according to the results of the Empire Manufacturing survey. The general business conditions index improved to -0.6 from -9.4 in June, the improvement was better than the reading of -5 expected by economists.
The finer details of the retail sales report for June weren't very encouraging. Retail sales rose 0.6% month-over-month in June, propped up by auto and gasoline sales. Gasoline sales rose 5%, reflecting higher prices. Excluding gasoline and auto sales, retail sales remained anemic, showing a 0.2% monthly drop. Overall, retail sales declined a seasonally adjusted 1.7% in the second quarter compared with a 5.5% drop in the first quarter.
Inflation reports confirmed the prevalence of benign inflation environment. Producer prices surged up 1.8% in July compared with the previous month. Excluding food and energy, core producer prices rose 0.5%, while economists had expected only 0.1% growth. Energy prices were up 6.6%, food prices moved up 1.1% and autos prices rose 3.4%.
At the same time, consumer prices rose 0.7% month-over-month in June, while the core inflation rate was at 0.2%. Both the rates were one-tenth of a percentage point higher than what economists had expected. Annually, the consumer price index was down 1.4%, marking the biggest drop since 1950. Excluding food and energy, the annual core inflation rate was 1.7%.
Meanwhile, 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. Commenting on the report, First Trust Advisors noted that industrial output historically rebounds only 1-3 months after the end of a recession. A rebound is expected when GM and Chrysler restart operations in the third quarter.
There appears to be a lull after the storm. The unfolding week's economic calendar is very light compared to the previous week, which saw the release of several market moving numbers. The spotlight is likely to be on the existing home sales report to be released on Thursday, the weekly jobless claims report and the Conference Board's leading indicators index for June.
Additionally, traders may also keep an eye on the revised consumer sentiment report of Reuters/University of Michigan. The focus is also likely to be on comments from Federal Reserve Chairman Ben Bernanke, who is due to testify before Congress twice during the week.
Existing home sales are likely to increase slightly, lending credence to thoughts of some economists concerning stabilization in the housing horizon. The expectation is supported by the fact that pending home sales have been rising for four consecutive months. That said, FTN Financial cautions of the blurring relationship between pending home sales and existing home sales due to stricter credit standards, falling income levels and increasing mortgage rates.
Distressed sales and to some extent improving affordability should offer some support to sales, while the still fluid demand environment is likely to drive sales lower. With the jobless rate expected to climb further even after a recovery begins, existing home sales are unlikely to see a solid rebound any time soon.
Reflecting the still shaky confidence of consumers, the Reuters/University of Michigan's consumer sentiment survey is likely to show a pullback in consumer sentiment in July from a 16-month high of 70.8 in June. Non-farm payroll employment numbers are still showing job losses. However, the decline in gasoline prices and the resumption of the positive momentum in the stocks markets should support confidence to some extent.
The Conference Board is scheduled to release a report on the U.S. leading index for June at 10 AM ET on Monday. The consensus estimate calls for a 0.5% increase in the leading indicators index for the month.
The leading indicators index rose 1.2% in May, more than the 1% increase estimated by economists. However, the coincident as well as the lagging indicators indexes fell by 0.2% each. The index of supplier deliveries, interest rate spread, stock prices, real money supply, the index of consumer expectations, building permits and manufacturers' new orders for non-defense capital goods were the components that contributed positively to growth, whereas weekly manufacturing hours, average weekly initial claims for unemployment insurance and manufacturers' new orders for consumer goods and materials acted as drags.
Atlanta Federal Reserve Bank President Dennis Lockhart is due to deliver a speech on economic outlook in Nashville, Tennessee to the Rotary Club of Nashville at 1:30 PM ET.
Bernanke is set to deliver his semi-annual monetary policy testimony to the House Financial Services Committee in Washington at 10 AM ET on Tuesday.
Bernanke will also testify before the Senate Banking Committee at 10 AM on Wednesday.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday.
Crude oil stockpiles fell by 2.8 million barrels to 344.5 million barrels in the week ended July 10th, with inventory levels remaining above the upper boundary of the average range. Gasoline inventories rose by 1.5 million barrels and were in the upper half of the average range.
Distillate stockpiles edged up by 0.6 million barrels and remained above the upper boundary of the average range. Refinery capacity utilization averaged 87.2% over the four-weeks ended July 10th compared to 86.7% in the previous week.
The Labor Department is due to release its customary weekly jobless claims report for the week ended July 18th at 8:30 AM ET on Thursday.
First time claims for unemployment benefits continued to decrease in the week ended July 11th, according to a report released by the Labor Department on Thursday, with initial jobless claims falling by more than economists had been expecting.
The report showed that jobless claims fell to 522,000 from the previous week's revised figure of 569,000. Economists had been expecting jobless claims to fall to about 530,000 from the 565,000 originally reported for the previous week.
The National Association of Realtors is scheduled to release its report on existing home sales for June at 10 AM ET on Thursday. Economists estimate existing home sales of 4.80 million for the month.
Existing home sales came in at a seasonally adjusted annual rate of 4.77 million units in May, representing a 2.4% month-over-month increase from 4.66 million in April. Single-family sales rose 1.9% and multi-family sales climbed 6.1%, with both readings showing increases for the second straight month. The median existing home price fell 16.8% year-over-year to $173,000, although it rose 3.8% month-over-month. Existing home inventories fell to 3.798 million from 3.978 million in April, with the months of supply declining to 9.6 from 10.1 in April.
The Reuters/University of Michigan's final report on the consumer sentiment index for July is scheduled to be released at 9:55 AM ET on Friday. Consumer confidence is expected to rise in the month, with economists forecasting an increase in the index to 64.6 from June's 70.8, but unchanged from the mid-month reading.
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