Economic Week in Review - February 15, 2008

Trade deficit shrinks, retail sales up
Economic news has been gloomy lately, but this week there were some encouraging signs. Reports showed better-than-expected retail sales and a reduced U.S. trade deficit. Still, in Senate testimony, the Federal Reserve chairman described the economy as "sluggish," and he also left the door open to additional cuts in the federal funds rate. On Wednesday, President George W. Bush signed into law a $168 billion package aimed at stimulating the economy through tax rebates. For the week, the S&P 500 Index rose 1.4% to 1,350 (for a year-to-date total return of –7.8%). The yield of the 10-year U.S. Treasury note rose 12 basis points to 3.76%.

U.S. trade deficit improves
The U.S. trade deficit narrowed 7.0%, to $58.8 billion, in December (from $63.1 billion in November). Analysts had expected a trade deficit of $61.6 billion. Exports rose by $2.2 billion, while imports declined by the same amount. The weakness of the dollar relative to other currencies was credited with helping to cut the trade deficit. For the year, the trade deficit declined by $46.9 billion, or 6.0%.

Retail sales rebound
Retail sales climbed 0.3% in January, recovering from a 0.4% drop in December. Analysts had expected a 0.3% decline. Gas stations had the strongest growth, with sales up 2.0%. Sales of automobiles and parts were up 0.6%. Excluding gasoline and autos, however, sales were unchanged.

Stimulus package enacted, rebates to come
President Bush signed an economic stimulus package that provides tax rebates to millions of households. Many single filers will receive $600, while many married couples will get $1,200. The rebate amounts, however, begin to phase out for individuals with incomes over $75,000 and for married couples with incomes over $150,000. The IRS will start mailing rebate checks in May.

Fed chairman: Further rate cuts possible
In testimony to the Senate Banking Committee on Thursday, Federal Reserve Chairman Ben S. Bernanke said, "Downside risks to growth remain, including the possibilities that the housing market or labor market may deteriorate to an extent beyond that currently anticipated." The Fed is open to further reductions in the federal funds rate "as needed to support growth," he said. Mr. Bernanke also said he expects "a somewhat stronger pace of growth starting later this year" as the effects of the stimulus package and Fed rate cuts take hold. Since September, the Fed has reduced the federal funds rate, which greatly influences the cost of borrowing for consumers and businesses, by 2.25 percentage points.

Business inventories head higher
December's business inventories grew 0.6%, boosted by increases in the manufacturing and wholesale sectors. Retail inventories nudged down 0.1%, fueled by a 1.6% slide in auto inventories. Excluding autos, retail inventories were up 0.7%.

Industrial production ekes out a gain
Industrial production in January inched up 0.1%. Manufacturing sector output was unchanged, while utility output climbed 2.2%. Capacity utilization in the industrial sector was 81.5% compared with the historical average of 81.0%.

The economic week ahead
Next week's reports will include a reading on the outlook for the economy with the release Thursday of The Conference Board's index of leading economic indicators. Also due are the latest reading on the Consumer Price Index (Wednesday), a report on new residential construction (Wednesday), and the minutes from the January meeting of the Federal Open Markets Committee (Wednesday).

Economic Week in Review
September 7, 2007
by Cheryl Anderson, Stewart Title

Jobs take a tumble
The continuing slump in the housing market appears to be affecting the broader economy, as a closely watched employment report showed that U.S. payrolls fell for the first time in four years. The weaker-than-expected jobs report was widely seen as putting more pressure on the Federal Reserve to reduce interest rates. Not all of the week's economic news was downbeat, however, as worker productivity increased at a faster-than-expected pace. For the week, the S&P 500 Index was to 1,454 (for a year-to-date total return of 3.79%). The yield of the 10-year U.S. Treasury note fell 17 basis points to 4.37%.

Payrolls slid unexpectedly
Nonfarm payrolls declined by 4,000 in August, the Labor Department reported Friday. Economists had been expecting an increase of 120,000. Reflecting weakness in the housing market, construction was among the sectors that suffered the heaviest job losses, with residential specialty trade contractors particularly hard hit. The anemic employment report, which included sharp downward revisions for the June and July payrolls as well, "will weigh more prominently than normal in the Federal Reserve's deliberations on monetary policy" when they next meet on September 18, remarked Vanguard economist Joseph H. Davis. The unemployment rate, which is based on a different survey than the one used for payrolls, remained unchanged at 4.6%.

Productivity, labor costs were better than expected
U.S. productivity grew by an annualized 2.6% in the second quarter, an upward revision from the Labor Department's preliminary estimate of 1.8%. The latest productivity figure exceeded economists' expectations and appeared to be a reassuring sign to inflation-watchers, as rising productivity can help restrain inflation. Also encouraging from an inflation standpoint, unit labor costs grew at an annualized 1.4% in the second quarter, slightly less than economists had expected and a significant downward revision from a preliminary estimate of 2.1%.
Beige Book survey reported tighter credit hurting housing sector
The Federal Reserve's anecdotal survey of regional economies, known as the "Beige Book," found that tighter residential mortgage lending standards are exacerbating problems in the housing sector. Banks reported to the Fed that the reduction in the availability of mortgages created "uncertainty about when the housing market might turn around." On the positive side, the report noted "modest to moderate" increases in retail sales and found that some regions were experiencing "particularly solid growth in tourist spending." The report suggested that inflation, on the whole, is under control, with most regions reporting "little change in overall price pressures."

Manufacturing growth slowed, service sector remained stable
Growth in the manufacturing sector declined in August. The Institute for Supply Management (ISM) Index of manufacturing decreased to 52.9 from July's 53.8, the second consecutive drop for the index. However, the index reading did remain above 50, suggesting that the manufacturing sector is still expanding, albeit at a slower pace. The ISM Non-Manufacturing Index, a gauge of economic activity in the service sector, remained at 55.8, unchanged from July. The August reading was slightly ahead of expectations, and the new-orders component of the index climbed 4.2 points.

Construction spending slipped
Construction spending in July fell 0.4%, much weaker than the 0.1% increase that economists had expected. Private construction spending slid 0.7%, hurt by a falloff in residential construction that reflected continued weakness in the housing market and that more than offset gains in nonresidential spending.

The economic week ahead
The coming week's economic reports should offer insight into varied aspects of the economy. Reports on the U.S. trade balance (Tuesday), consumer credit (Monday), retail sales (Friday), business inventories (Friday), and industrial production (Friday) are scheduled to be released.

Have a wonderful and successful week!

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