Wall Street looks ahead to Fed meetingInvestors sifted through economic data points with a fine-tooth comb this week, seeking indications of whether the Federal Reserve Board will change the federal funds rate when it meets on September 18. In all, the reports were mixed. Retail sales and industrial production increased, but so did business inventories. The U.S. trade gap narrowed, but Americans are now borrowing more heavily with their credit cards. In other economic news, the price for oil moved above $80 per barrel for the first time, and the dollar weakened against other major currencies. For the week, the S&P 500 Index was up 2.1% to 1,484 (for a year-to-date total return of 6.0%). The yield of the 10-year U.S. Treasury note rose 9 basis points to 4.46%.
Credit card usage increased
Consumer credit grew at a slower-than-expected annual rate of 3.7% in July. The credit figure, released by the Federal Reserve Board, comprises two categories: revolving credit (namely, credit cards) and nonrevolving credit (such as auto or student loans). July's consumer credit marked a slowdown in nonrevolving credit, reflecting poor auto sales in June and July. The use of revolving credit increased, suggesting that consumers are borrowing more with their credit cards now that other sources of credit (such as home equity loans) are less readily available.
U.S. trade balance narrowed
The U.S. trade deficit fell 0.3% in July to $59.2 billion—the second decline in as many months. Imports and exports both increased in July, but exports increased at a higher rate, thanks to record levels of U.S. shipments of food, autos, and other categories. The dollar increase in imports was fueled by steeper prices for oil. The average price per barrel of crude oil in July was the highest since August 2006, and the second-highest on record. The $23.8 billion deficit with China—the second-highest on record—accounted for 40% of the total U.S. trade deficit.
Autos pushed retail sales higher
Retail sales in August increased 0.3% from July and 3.7% from August 2006. Excluding the automotive category, which surged 2.8%, retail sales were down 0.4% in August. Gasoline stations, building supply stores, and nonstore retailers (such as online and catalog vendors) posted the steepest sales declines for the month.
Business inventories increased
Total business inventories increased 0.5% in July from the previous month and 3.5% from the year-ago level. Retail inventories rose 1.0%, while wholesale and manufacturer inventories each increased 0.2%. Overall business sales increased 1.1% in July, driven by strong sales (2.6%) at the manufacturing level.
Electric utilities drove production higher
A jump in production at electric utility plants pushed overall industrial production higher in August. Industrial output increased a lower-than-expected 0.2% for the month as activity in the manufacturing and mining sectors each declined less than 1%. But a 5.3% increase in utilities (6.3% at electric utilities) kept production in positive territory.
The economic week ahead
Market observers will pay close attention to Tuesday's meeting of the Federal Reserve Board's Open Market Committee (FOMC), when Chairman Ben Bernanke and his colleagues will determine whether to raise, lower, or hold steady the federal funds rate. Following a turbulent period in the markets, falling employment, and ongoing concern about the housing sector, some Fed-watchers expect the FOMC to make the first rate cut in more than a year. In addition, two reports on inflation will be issued: the producer price index on Tuesday, and the consumer price index on Wednesday. Other scheduled releases include new residential construction (Wednesday) and an index of leading economic indicators (Thursday).
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