The week's economic reports

Following is a summary of last week's economic reports. Disappointing retail sales in June along with higher import prices and expanding consumer credit are all signs of a weakening consumer sector that continues to be pressured by higher energy and food prices. Stocks soared and bonds ended the week up slightly as the S&P 500 Index gained 1.5 percent to 1,553, now up 9.5 percent on the year, and the yield of the 10-year U.S. Treasury Note fell 8 basis points to 5.11 percent.

Consumer Credit: About equally split between revolving credit (e.g., credit cards) and non-revolving credit (e.g., auto loans), overall consumer credit soared $12.9 billion in May following increases of $6.5B, $3.0B, $13.5B, and $2.6B in the first four months of the year.

While volatile from month to month, the overall levels have increased markedly from last year as an increasing number of consumers opt to use traditional forms of credit instead of home equity financing amid the continuing housing slump. During all of 2006, the average monthly increase in consumer credit was $5.1 billion, so far in 2007, the average increase is more than 50 percent higher at $7.7 billion per month.

International Trade: The trade gap between the U.S. and the rest of the world widened in May to $60.0 billion from an upwardly revised level of $58.7 billion in April. The trade deficit with China increased from $19.4 billion in April to $20.0 billion in May while the gap with Canada narrowed from $5.8 billion to $5.2 billion.

Higher oil prices were once again the most important factor, crude oil imports rising from $22.4 billion in April to $23.9 billion in May as prices rose from $57.28 per barrel to $59.36. The bad news is that most of the recent run-up in oil prices occurred in June and is not reflected in this report - look for a sharp increase in the headline number next month.

Retail Sales: See yesterday's report The downward trend in retail sales.

Import/Export Prices: Led by costlier petroleum products, prices of imported goods rose for the fifth consecutive month in June, a continuing sign of both higher overall prices and the weakening dollar. After an upwardly revised increase of 1.1 percent in May, import prices climbed a full 1.0 percent in June. On a year-over-year basis, imported goods have risen only 2.3 percent, however, this is based on a year ago comparison when the price of crude oil was significantly higher. Prices excluding petroleum rose only 0.2 percent in June after gaining 0.5 percent in May.

Export prices rose 0.3 percent in June and are up 4.4 percent from year ago levels. Prices for agricultural exports rose 2.8 percent and are now up 18.5 percent from this time last year, driven higher by soaring corn prices over the last year that have now affected other agricultural products such as milk.

Consumer Sentiment: Surprisingly, the University of Michigan's measure of consumer sentiment rebounded to 92.4 in early July from a level of 85.3 in June. Though gasoline prices have come down from recent highs, the average price at the pump is still close to $3 - this rebound may be a sign that consumers are learning to live with high fuel costs and that stock market gains are now offsetting the "pain at the pump".

The one-year inflation expectations index fell from 3.4 percent in June to 3.3 percent in early July, boosting the "inflation anchoring" hopes of the Federal Reserve, however, I continue to believe that the typical consumer is so confused about rising prices that they really have no clue how to answer the survey question, "How much do you think prices will rise over the next year". It seems that "inflation anchoring" may have more to do with constant repetition of the government's two and three percent inflation statistics rather than anything an individual could deduce on their own.

Summary: While the data is difficult to interpret due to its volatility, there is clearly an ongoing slowdown in consumer spending stretching back to early 2006 when the housing market first began to cool. The most recent decline in retail sales helps to make the case that strength seen earlier in the year is more likely a bounce rather than the beginning of a recovery, something that will not be known with any certainty for at least a few more months.

Costlier petroleum products pushed both the trade deficit and import prices higher and the effect of higher crude oil prices will continue to be felt in upcoming reports due to the lag in reporting as oil prices have continued to soar - look for bigger numbers next week for both consumer prices and producer prices.

When it comes to their cost of living, there appears to be little relief in sight for the American consumer who defied nearly all odds with an improving outlook in the latest consumer sentiment poll. Can it really be that if the stock market goes up faster than energy and food prices, this is a net positive for consumers?

The Week Ahead: Economic reports in the week ahead will be highlighted by consumer prices and housing starts on Wednesday. Also scheduled for release are reports on producer prices and industrial production on Tuesday, leading economic indicators and the minutes from the June 28th FOMC meeting on Thursday, along with two regional manufacturing reports.