The week's economic reports

Following is a summary of last week's economic reports. There were no big surprises for either producer or consumer prices, housing showed no sign of improving anytime soon, and the continuing rebound in manufacturing was again demonstrated in reports for national productivity and regional manufacturing activity.

Stocks and bonds ended the week with the S&P 500 Index down 1.2 percent to 1,534, now up 8.2 percent on the year, and the yield of the 10-year U.S. Treasury Note falling 15 basis points to 4.96 percent.

NY Empire State Index/Philadelphia Fed Survey: The New York area survey of manufacturing activity followed up last month's gain with another very good showing while the Philadelphia survey came in below expectations, however, it was still better than most readings over the last year.

Along with the much broader ISM manufacturing index and the Chicago area purchasing managers index, these two reports from Federal Reserve districts in the northeast have shown strength in recent months leading to what should be a much improved tally for second quarter economic growth.

Producer Prices: Producer prices fell 0.2 percent in June after a steep 0.9 percent increase in May while core PPI (excluding food and energy) rose 0.3 percent after a 0.2 percent gain in May. On a year-over-year basis, overall producer prices are up 3.2 percent and the core rate is up 1.8 percent.

Energy prices rose 4.2 percent in May but declined 1.1 percent in June, driven by a 3.9 percent decline in the price of gasoline which helped push the overall PPI lower. With gasoline prices now rising again, the PPI is expected to move higher again next month.

Industrial Production/Capacity Utilization: Overall industrial production gained 0.5 percent in June following a downwardly revised decline of 0.1 percent in May. The June reading was the second biggest increase this year and the third best of the last year. Capacity utilization rose from 81.4 percent in May to 81.7 percent in June.

The output of consumer goods surged 0.7 percent led by a 2.5 percent jump in motor vehicles and a 0.8 percent increase in durable goods as a whole. This improvement is consistent with the many other upbeat manufacturing reports in recent months - it remains to be seen whether consumers will gobble up all of this new production in the months ahead or if inventory will again begin to build. Based on recent dismal auto sales, it is more likely to be the latter.

Housing Market Index: The National Association of Home Builders' housing market index dropped to its lowest level in 16 years. This was the third worst reading in the 23-year history of the index and the lowest since the depths of the early 1990s recession. All components fell - current sales, expected sales over the next six months, and prospective buyer traffic.

Consumer Prices: Overall consumer prices rose 0.2 percent in June after an increase of 0.7 percent in May while the core rate also rose 0.2 percent after gaining 0.1 percent in May. On a year-over-year basis, both measures were unchanged from last month, overall inflation was up 2.7 percent and the core rate rose 2.2 percent.


Core inflation came back to the 0.2 percent monthly rate that has been the norm for most of the last four years. On an unrounded basis, core CPI rose 0.0.2324 percent in June after an increase of 0.1498 percent increase in May.


Energy prices declined 0.5 percent for the month, led by a 1.1 percent drop in gasoline costs. Based on recent trends in retail gasoline prices, this is likely to reverse in next month's report. The energy price index has gained almost 14 percent in the first six months of the year and with last fall's big energy sell-off about to be removed from the year-over-year comparisons (see chart above left), some relatively large year-over-year increases to the overall CPI may be seen in the months ahead.

Housing Starts: Housing starts gained slightly from May to June, but only after the customary downward revision to the previous month's data. This has been going on for more than a year now and the most recent report is a good example of how new home construction is even worse than it might appear from reading the newspapers.

The most recent financial news headlines for housing starts indicated a 2.3 percent improvement from May to June following last month's increase of 3.8 percent from April to May. So why does the chart below show a decline in housing starts from April to May? With the downward revision to the May data, the April-to-May gain changes from a 3.8 percent increase to a decline of 4.7 percent and, if form holds, next month the June totals will be revised downward either reducing or eliminating the 2.3 percent gain just reported for June.


Permits issued for new home construction made a new 10 year low falling a whopping 7.5 percent in June after rebounding 4.3 percent in May. Housing permits are now down more than 25 percent from year-ago levels and, as a leading indicator for new home construction, paint a very dismal picture for the housing market for the rest of the year. Consistent with the NAHB housing market index reported earlier in the week, there is clearly no bottom yet in sight for the homebuilders.

Leading Economic Indicators: The Conference Board's index of leading indicators fell 0.3 percent in June after a 0.2 percent rebound in May. This index has declined in four of the last six months with the most recent weakness driven by declining building permits. Positive contributions to the index were made by manufacturing activity and stock prices.

FOMC Meeting Minutes: The minutes from the June 27-28 FOMC meeting showed little deviation from the recent commentary from the Federal Reserve - inflation remains the top priority and economic growth will remain subdued as a result of ongoing weakness in housing.

"Headline consumer price inflation stepped up in recent months, driven by large increases in the index for energy. However, readings on core inflation had declined. Core PCE prices rose 0.1 percent in April and were estimated to have posted a similar, modest increase in May. The recent readings had been held down, in part, by declines in volatile categories such as apparel and tobacco products that were likely to prove transitory; the rent components had also decelerated."

"Although inflation pressures seemed likely to moderate over time, the high level of resource utilization had the potential to sustain those pressures. The Committee's predominant policy concern remained the risk that inflation would fail to moderate as expected."

Summary: There seems to be little new in this batch of reports - it's pretty much the same story that we've heard for a few months now. Housing is bad and getting worse, the rebound in manufacturing continues though it's not clear who is going to buy all the manufactured goods since the consumer appears to be slowing down, and government-reported inflation is tame albeit higher than the Federal Reserve would like it to be.

Somehow it seems as though we're overdue for a surprise of some sort in the weekly economic reports - maybe it will come in next week's advance estimate of second quarter real GDP.

The Week Ahead: Economic reports in the week ahead will be highlighted by the first look at second quarter economic growth on Friday. Also scheduled for release are reports on existing home sales on Wednesday, durable goods and new home sales on Thursday, and consumer sentiment on Friday.