The week's economic reports

There were no important developments in the economy significant economic reports last week, volatility in credit and asset markets making up for this shortfall and then some. Stocks ended the week with the S&P 500 Index up 1.4 percent to 1,454, now up 2.5 percent on the year, and bonds fell, the yield of the 10-year U.S. Treasury note rising 8 basis points to 4.78 percent.

Productivity and Labor Costs: Nonfarm productivity during the second quarter improved to an annualized increase of 1.8 percent after a downwardly revised gain of 0.7 percent in the first quarter. On a year-over-year basis, productivity stood at 0.6 percent, up from the 0.4 percent gain as of the first quarter, but trailing the Q2-2006 year-over-year increase of 1.5 percent. Productivity gains have been trending downward since reaching a peak in 2003.

Unit labor costs rose at an annualized rate of 2.1 percent during the second quarter, down from the 3.0 percent increase in the first quarter but above expectations. On a year-over-year basis, labor costs have risen 4.5 percent after increasing 3.7 percent from year-ago levels in the first quarter, prompting concerns of increased inflationary pressures.

Consumer Credit: Consumer credit soared again in June, up $13.1 billion after an upwardly revised increase of $16.0 billion in May. The most recent report is part of a broad trend over the last year or so where consumers have shifted back to using traditional forms of credit rather than borrowing against their homes, as was the case during 2004 and 2005. The June increase in outstanding consumer debt was split about evenly between revolving credit (e.g., credit cards), up $6.3 billion and non-revolving credit (e.g., auto loans), up $6.8 billion.

FOMC Meeting: As expected, the Federal Open Market Committee left short-term interest rates at 5.25 percent, however, the much anticipated policy statement included new verbiage acknowledging the trouble in the credit and housing markets while at the same time maintaining the Fed's inflation fighting bias. Those clamoring for a clear indication that rate cuts will be forthcoming must have been quite disappointed.

The critical new section of the statement reads, "Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing". Those who follow real estate closely would surely take issue with the characterization of what is currently happening in the nation's housing market as a " correction" that is "ongoing". Further, the Bernanke-led Fed acknowledged new risks to growth while citing inflation as a concern, "Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."

It remains to be seen whether the courageous stand at the Fed will prove to be prudent or, as was the case in 2000, asset and credit markets are providing clear warning signals that the Fed has chosen not to heed. Recall that rate cuts from the Greenspan Fed did not come until December of 2000, after the Nasdaq had plunged 50 percent and the S&P500 had declined 15 percent.

As was the case in 2000, today, the effects of an asset bubble bursting have not yet appeared in the broader economy in a meaningful way, helping to convince the Fed that changes to monetary policy are not yet warranted. As was the case in 2000, the effects are likely to show up in the broader economy in the months ahead, compelling the Federal Reserve to cut rates at a faster pace than they otherwise would.

Summary: This was one of the least eventful weeks for economic reports in some time, the only excitement being offered by the FOMC policy statement for what it did not say.

The Week Ahead: The week ahead will be jam-packed with economic news highlighted by retail sales on Monday, consumer prices on Wednesday, and housing starts on Thursday. Also scheduled for release are international trade and producer prices on Tuesday, industrial production, the NY area manufacturing survey, and the NAHB housing market index on Wednesday, leading economic indicators and the Philadelphia manufacturing survey on Thursday, and consumer sentiment on Friday.