Economic Week in Review
Economic Week in Review by: Cheryl Anderson, Stewart Title
August 17, 2007

Stocks slump, Fed cuts discount rate on Friday
In a surprise move, the Federal Reserve cut its discount rate on loans to banks Friday morning, in an effort to calm the financial markets. Through the week, stocks had continued to slump because of turmoil in the subprime mortgage market, erasing most of 2007's gains. It was a busy week for economic reports. On the plus side, the U.S. trade deficit declined in June, while the July Consumer Price Index indicated that inflation pressures were easing. In other reports, retail sales and industrial production increased; business inventories and producer prices also rose. New residential construction declined. For the week, the S&P 500 Index fell 0.5% to 1,446. The yield of the 10-year U.S. Treasury note fell 11 basis points to 4.67%.

Retail sales increased
The retail sales report for July showed a modest increase, up 0.3%. Core sales (which exclude autos) were solid, lead by sales at department and apparel stores as well as restaurants. Building-supply stores also posted a small gain. Declining gasoline prices hurt gas-station sales, and automobile and parts sales were down 0.3%. Consumer spending appears to be holding firm despite recent turmoil in the financial markets.

Business inventories rose
In line with expectations, total business inventories increased by 0.4% in June. Wholesale and manufacturer inventories increased 0.5% and 0.3%, respectively. Retail inventories were up 0.5% for the month, 0.2% excluding automobiles. Auto inventories rose by 1.0%. The inventory-to-sales ratio rose slightly to 1.27, up from May's 1.26, due largely to weakness in auto sales.

Producer prices moved higher
July saw substantial rates of inflation at every stage of processing. Producer prices for finished goods rose 0.6%, more than expected, due largely to increases among energy products, as energy costs rose 2.5%. Core prices remained relatively stable, however; excluding food and energy, prices for finished goods rose only 0.1%.

U.S. trade deficit narrowed
The U.S. trade deficit narrowed by 1.7% in June to $58.1 billion, a $1.0 billion change from May's revised figure of $59.2 billion. Though both exports and imports were up, exports increased more than imports, aided by a weaker U.S. dollar. The goods deficit with China grew to $21.2 billion, and the China deficit now accounts for 36% of the total U.S. trade imbalance. Compared with one year ago, exports rose in June by 11%, while imports increased 4%.

CPI showed inflation easing
The Consumer Price Index (CPI) for July provided evidence that inflationary pressures were easing. Following a 0.2% increase in June, the CPI was up 0.1% in July, due largely to falling energy prices. The core index, which excludes food and energy, increased 0.2% in July, following an identical increase in June. Core inflation has trended around 2.2% over the past 12 months.

Industrial production increased
In July, industrial production rose 0.3%, slowing the momentum of its 0.6% June increase. Mining output rose 0.7% and manufacturing output increased 0.6%, while utility production showed a larger-than-expected drop of 2.1%. Manufacturing output has increased an annualized 4.9% over the last three months. Automobile production was strong, up 2.6%, though sales were weak.

New residential construction declined
The July report on new residential construction suggested that the housing market has yet to reach bottom. New residential starts decreased 6.1% to 1.38 million units, with declines seen in every region. Total permits also decreased. A National Association of Home Builders Housing Market Index suggested that builder optimism is at a 20-year low.

Fed cut discount rate Friday morning
In a surprise move, the Federal Reserve cut its discount rate by a half-percentage point, in an effort to bring some order to the turbulent financial markets. Citing tighter credit and deteriorating market conditions, the Fed lowered the discount rate, which is the interest rate it charges to make direct loans to banks, from 6.25% to 5.75%. However, the Fed did not change the federal funds rate, which remained at 5.25%. The move should thus have little effect on consumer interest rates.

The economic week ahead
Next week will be a light one for economic reports. On Monday, The Conference Board will release its index of leading economic indicators. Data on durable-goods orders and new-home sales will be available on Friday.

Cheryl Anderson
949-212-2903
http://www.stewartoc.com/