Economic Highlights for the Week Ending May 23, 2008

MONDAY, May 19th
The Fed is expected to hold rates steady until the inflation outlook can be sorted out. Fed funds futures traders are pricing in an 80% probability the Fed will hold the fed funds target at its current level of 2.0% at the June meeting. The hope is that policy stimulus in the pipeline will help restore solid economic growth but in the meantime, slower economic growth will help to curtail inflationary pressures. The Fed will need some time to observe this happening and confirm it through the economic data.
The index of leading economic indicators rose 0.1% in April better than expected. Like a lot of economic data recently, the LEI is signaling that economic activity has stalled, but not collapsed and that recovery may still take a while. The level of the index is consistent with continued sluggish growth over the next six to nine months.
TUESDAY, May 20th
The producer price index increased 0.2% in April less than an expected gain of 0.4% as food and energy costs subsided during the month. Over the last year, producer prices have increased 6.4%, one of its fastest paces in the past 25 years. Excluding food and energy prices, the core PPI jumped 0.4% last month and gained 3.0% over the last year. A temporary reprieve in catapulting food and energy costs brought underlying price pressures to bear from earlier stages of processing. Upward price pressures from food and energy are expected to resume in the months ahead.
WEDNESDAY, May 21st
The MBA mortgage applications index fell 7.8% to 621.6% for the week ending May 16. The purchase index fell 6.9% on the week and remains 19.5% lower than its year ago level. The refinance index tumbled 8.7% last week but is up 2.6% over last year. Mortgage rates have yet to respond to substantial Fed easing. Stubborn rates combined with falling home values, tighter credit and weak economic conditions have crimped loan demand and dried up many refinancing opportunities. It appears the housing market is still searching for a bottom.
The minutes from the April 29-30 FOMC meeting showed that the quarter point cut at that time was a close call and future cuts would be unlikely even if the economic conditions worsened. Policy makers then turned their attention to financial markets and inflation as the primary drivers of policy decisions. Accompanying the release of the meeting minutes was the latest Fed forecast which projected even slower growth and higher inflation and unemployment. Growth for 2008 is expected to be between 0.3% and 1.2% down from 1.2% to 2.0% previously, unemployment was forecast to be between 5.5% and 5.7% up from 5.2% to 5.5% earlier and inflation was projected to rise between 3.1% and 3.4% from 2.1% to 2.4% originally.
WEDNESDAY, May 21st
Long term mortgage rates eased somewhat on a couple of weaker-than-expected economic reports last week. Consumer sentiment dropped to a multi-decade low while industrial output declined sharply. 30-year fixed rate mortgages averaged 5.98% this week compared to 6.01% last week according to Freddie Mac's mortgage market survey. Short term mortgage rates were a bit higher on average related to expectations that Fed is done cutting rates for now.
Jobless claims fell 9k to 365k for the week ending May 17. Initial claims have leveled off in recent weeks indicating a stable, but elevated pace of layoffs. Continuing claims continue to trend higher indicating weak job creation. Jobless claims data suggest another weak employment report for May, due to be released June 6.
FRIDAY, May 23rd
Existing homes sales fell 1.0% in April to an annualized pace of 4.89 million compared to expectations for a larger decline to a rate of 4.85 million according to the National Association of Realtors. Sales declines have slowed recently indicting still weak but stable housing market conditions. Lower prices and low interest rates are stimulating sales increases in some areas, reports the NAR.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12479.63 12986.80 -501.17 or -3.90%
NASDAQ 2444.67 2528.85 -84.18 or -3.32%
WEEK IN ADVANCE
In the week ahead, inflation remains the key to the interest rate outlook. Some of the economic data and Fedspeak will address inflation concerns while the financial markets will continue to battle with rising oil prices and their impact on the economy and inflation.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending May 16, 2008

MONDAY, May 12th
It looks like the Fed will be on hold for the next few meetings. Fed funds futures traders are pricing in roughly an 85% probability the fed funds rate target will remain unchanged at 2.00% following the June 25 FOMC meeting. With policy currently accommodative, the Fed believes they have addressed growth conditions for now. Inflation remains a concern though and further lowering of rates could exacerbate price pressures.
TUESDAY, May 13th
Retail sales fell 0.2% in April as expected. Weak motor vehicle & parts sales led the decline last month. Sales at gas stations also fell, despite higher prices. Excluding autos, retail sales jumped 0.5% on surprising gains at building supply and electronics and appliance stores. Excluding autos and gas, core retail sales gained 0.6% on the month. Despite the strength in core retail sales, consumer spending has been trending lower and is expected to remain weak going forward.
Import prices jumped 1.8% in April, largely in line with expectations. Petroleum prices once again led the advance though food prices boosted import costs as well. Excluding petroleum, import prices still rose 1.1% on the month showing a transfer of percolating inflationary pressures from abroad to the domestic economy.
The National Association of Realtors reported that the national median house price fell 7.7% in Q1 from the same period one year ago and was down 4.6% from Q4. That was the largest year-over-year drop in home prices since the NAR started tracking them in 1982. The national median sales price now stands at $196,300, the first time below 200k since the onset of the housing bubble 5 years ago.
WEDNESDAY, May 14th
The consumer price index increased 0.2% in April, a bit lower than an expected 0.3% gain. A 0.9% jump in food prices fed the gain as energy prices remained, surprisingly unchanged on the month. Excluding food and energy prices from the index, the core CPI rose just 0.1% to bring the yearly gain to 2.3%. Consumer inflation is somewhat higher than the Fed would like to see however it appears to be easing mildly under weak economic conditions.
The MBA mortgage applications index rose 2.9% to 674.4% for the week ending May 9. The purchase index fell 0.7% on the week and is down 12.4% from one year ago. The refinance index jumped 6.5% on a weekly basis and is up 14.5% its year ago level. Low rates are boosting refinance activity while falling home values are deterring prospective home buyers, thus weighing on purchase application volumes.
THURSDAY, May 15th
The NAHB housing market index fell to 19 in May from a level of 20 in April. Already at a severely depressed level, it was disheartening to observe another drop in sentiment. All three components of the index, ratings of present sales, sales six months from now and buyer traffic moved lower on the month. Builder sentiment remained mired at a low point as falling home values and tougher lending standards continue to deter buyers and curb demand.
Industrial production fell 0.7% in April, more than double expectations for a 0.3% decline. Sharp drops in mining and manufacturing output led to the large decline in overall production. Utility production gained on the month. The amount of capacity used for production fell sharply as well to 79.7% from 80.4% previously. Easing capacity utilization rates indicate some slack in resource usage, which will help to lower inflation.
FRIDAY, May 16th
Housing starts increased 8.2% in April to an annual rate of 1.032 million compared to an expected decline to a pace of 935k. After falling in March to their lowest level since 1991, starts unexpectedly rebounded in April. It is good to see starts over the million mark again; however they remain quite weak. High inventory levels compounded by weak new home sales and low home builder sentiment will keep new construction activity in the cellar for a while longer.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12986.80 12745.88 +240.92 or +1.89%
NASDAQ 2528.85 2445.52 +83.33 or +3.41%
WEEK IN ADVANCE
There are a couple of hurdles in the week ahead on an otherwise light economic calendar. The producer price index on Tuesday is the next major inflation reading. Inflation remains the key to the current on-hold stance for the Fed. Also, existing home sales, due out Friday will relay the latest data from the housing sector.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending May 9, 2008

MONDAY, May 5th
The ISM non-manufacturing index increased to 52.0% in April from a reading of 49.6% in March. This was the first reading above the key 50% level in four months suggesting expansion in the service industries. A pickup in employment last month is consistent with stronger demand. Nevertheless, service sector activity is trending lower over the long term in part related to the downturn in residential construction and turmoil in mortgage finance industries.
TUESDAY, May 6th
Financial markets expect the Fed to hold off on any other rate adjustments at this time but the question remains “for how long?’ Fed funds futures traders are pricing in just a 15% chance of another rate cut in June. Sentiment is clearly weighted toward no change in rates and for an extended period of time. December futures contracts are priced for the current 2.00% fed funds target rate implying no change in rates for the remainder of this year. Traders are fully pricing in a rate hike to 2.25% in February of next year, of course rate expectations will fluctuate between now and then as new information becomes available.
WEDNESDAY, May 7th
Nonfarm business productivity increased at a strong 2.2% annualized pace in the first quarter, up from 1.8% in Q4. This was well above estimates for a 1.5% rate of growth. Nonfarm unit labor costs rose at a 2.2% annual pace in Q1, slightly less than expected. These data indicate solid productivity growth, despite weaker economic conditions and without associated wage inflation.
Consumer credit increased by $15.3 billion in March, or at a 5.9% annual rate. Revolving credit rose by $6.3 billion as consumers used credit cards to fund consumption. Non-revolving credit shot $9.0 billion higher, which was surprising given anemic auto sales. Expect consumer credit to continue growing at a fairly robust pace, due to sharp declines in mortgage equity withdrawals.
The MBA mortgage applications index jumped 15.6% to 655.4% for the week ending May 2. Despite the gain, total application activity remains 3.7% below last year’s level. The purchase index gained 12.1% on the week but is down 13.0% from one year ago. The refinance index climbed 19.3% this week and is up 7.5% from last year. Lower rates should continue to support application activity going forward.
The pending home sales index dropped 1.0% in March to a level of 83.0, after a reading of 83.8 in February, the NAR reported today. The index remains 20.1% lower than its year ago level. Economists at the NAR forecast flat home sales activity over the next several months with some chance for a pickup in sales activity over the summer, which hinges on the accessibility of more affordable loans.
THURSDAY, May 8th
Chain store sales rose 3.6% in April, much higher than expected, boosted largely by calendar effects related to an early Easter. Wholesale clubs, department, drug and discount stores all posted solid gains last month while sales at furniture and apparel shops declined. Higher gas prices contributed to the sales gains as well. The outlook for spending remains weak going forward with some offset expected to be provided by tax rebate checks currently being sent to consumers.
Jobless claims fell 18k to 365k for the week ending May 3. Despite the decline last week, the level of claims remains elevated which means a large number of layoffs. Moreover, continuing claims have been trending higher over the last two years indicating sluggish job creation and making it difficult for laid off workers to find new jobs.
FRIDAY, May 9th
The international trade deficit narrowed sharply in March while February’s trade gap was less than first reported. The trade deficit dropped to $58.2 billion in March following a $61.7 billion gap in February. The trade picture improved on a $6.1 billion decline in imports related to a weaker domestic economy. Exports also declined on the month, by $2.6 billion, but continue to trend higher due to a weak dollar. The trade gap reduction in March will end up contributing as much as 0.6 percentage points to Q1 GDP growth in the next revision.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12745.88 13058.20 -312.32 or -2.39%
NASDAQ 2445.52 2476.99 -31.47 or -1.27%
WEEK IN ADVANCE
Economists and financial markets will be looking to a host of data releases in the coming week to provide further confirmation that the recession will be short and shallow, with modest inflationary pressures.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending May 2, 2008

MONDAY, April 28th
The FOMC policy statement and data flows this week should go a long way toward firming up the economic and interest rate outlook.
TUESDAY, April 29th
The consumer confidence index fell to 62.3% in April from an upwardly revised reading of 65.9% in March. This is the lowest index level since October 1993 with the exception of March 2003 at the start of the Iraqi war. Confidence levels remain very weak and face downside risks going forward given sluggish job creation, higher energy costs, falling home values and tighter credit.
The S&P/Case-Shiller 10-city and 20-city house prices indexes showed further depreciation of home values in February. The 10-city composite index fell 2.9% month-over-month and is down 13.6% year-over-year. The 20-city index fell 2.7% on the month and remains 12.7% lower over the past year. Yearly declines are the highest on record. In addition, price declines appear to be accelerating.
WEDNESDAY, April 30th
GDP grew at a 0.6% rate in Q1 compared to expectations for a 0.2% pace. Over the past year, the economy expanded at a 2.5% rate. Inventory investment was a positive contributor to growth during the quarter while residential investment, consumer spending and stronger imports proved to be detractors. While growth was mildly positive in Q1, data suggests there is little momentum heading into Q2. The GDP price index, an economy-wide measure of inflation and a mainstay for the Fed, increased 2.6% in Q1. The price index continues to ease from its cyclical peak of 3.4% registered in Q405.
The FOMC cut rates by 25 basis points today, as widely expected. The target for the fed funds rate now stands at 2.0%. This is the seventh policy easing for a cumulative 3.25 points since September. Given substantial easing to date, the removal of the phrase “downside risks to growth remain” from the statement and inflationary risks, experts believe that this may be an end to the Fed’s rate cutting campaign.
The MBA mortgage applications index tumbled 11.1% to 567.0% for the week ending April 25. The purchase index declined 4.8% on the week and is down 20.4% from a year ago. The refinance index plunged 16.7% on a weekly basis but remains 5.5% higher than its year ago level. The jump in mortgage rates last week probably produced the steep drop-off in application activity; also recent news of declining home values could be impacting application activity.
THURSDAY, May 1st
The ISM manufacturing index was unchanged in April at 48.6%. The better-than-expected index reading remains below the key 50% level indicating contraction in nationwide manufacturing activity. The index is not low enough though to suggest that the overall economy is in recession. Despite slow activity, input price pressures continued to rise.
Personal income rose 0.3% in March as personal spending increased 0.4%. Ongoing job losses threaten to weaken both income and spending growth going forward. An inflation gauge in this data series, the core PCE deflator increased 0.2% on the month and was up 2.1% over the past year, slightly above the Fed’s implicit comfort zone for inflation.
Jobless claims jumped 35k to 380k for the week ending April 26. The gain in initial claims more than reverses a 30k decline in claims levels in the previous week. Longer term averages also remain elevated suggesting another decline in payroll employment for April due to increased layoffs and weaker hiring.
FRIDAY, May 2nd
The economy shed 20,000 payrolls in April, much less than an anticipated decline of 75,000. Jobs losses stemmed from manufacturing and construction industries. A sharp gain in service sector payrolls led to less-than-expected losses last month. The unemployment rate slipped to 5.0% of the workforce. While labor conditions are a long way from being healthy, they appear to be improving which supports expectations for rate cut pause.
FRIDAY, May 2nd
The economy shed 20,000 payrolls in April, much less than an anticipated decline of 75,000. Jobs losses stemmed from manufacturing and construction industries. A sharp gain in service sector payrolls led to less-than-expected losses last month. The unemployment rate slipped to 5.0% of the workforce. While labor conditions are a long way from being healthy, they appear to be improving which supports expectations for rate cut pause.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 13058.20 12891.86 +166.34 or +1.29%
NASDAQ 2476.99 2422.93 +54.06 or +2.23%
WEEK IN ADVANCE
The economic calendar is very light in the week ahead and contains mostly second-tier data releases. Also, the Treasury conducts its quarterly refunding, auctioning $15 billion in 10-year notes Wednesday and $6.0 billion in 30-year bonds Thursday. New supply in the bond market could result in weaker demand, thus raising yields.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending April 25, 2008

MONDAY, April 21st
The size of the next rate cut has been pared back amid better than expected economic readings and improved financial market sentiment related to earnings and the belief that the worst of the credit crisis has passed. Fed funds futures traders are fully pricing in a quarter point rate cut at the conclusion of the two-day FOMC meeting. That would target the fed funds rate at 2.0%.
TUEDAY, April 22nd
Existing home sales fell 2.0% in March to an annual rate of 4.93 million units, in line with market expectations. NAR economists state that sales activity, while uneven at times, has remained within a narrow range since last September, indicating stable but still weak conditions. Support will come in the form of more policy measures, continued low rates and fiscal stimulus later in the year to help offset downside risks of a more severe economic downturn and raucous financial market turmoil.
The Fed has used other tactics besides easing monetary policy to address the credit crisis. One of them, the Term Auction Facility or TAF, which makes 28-day credit available to banks, took place today and drew stronger demand than the first TAF indicating the need for liquidity amid still critical credit market conditions. More lending facilities may be created in an effort to lower interbank lending rates and encourage banks to lend to one another.
WEDNESDAY, April 23rd
The MBA mortgage applications index fell 14.2% to 637.6% for the week ending April 18. The purchase index fell 6.4% on the week as refinancings dropped 20.2%. The decline in application volumes was due to tighter credit, and a substantial jump in mortgage rates.
While a quarter point rate cut is widely expected by the FOMC at their meeting next week, analysts and some economists believe that holding steady on rates would accomplish more for the Fed. It would surprise the markets; help establish the Fed’s inflation fighting credibility, could reverse some of the recent gains in commodity prices and bolster the dollar. The argument is that because rates have fallen so low investors have been buying commodities; that combined with much stronger global demand and industrialization has resulted in what many are calling a commodities bubble.
THURSDAY, April 24th
New home sales plunged 8.5% in March to an annualized pace of 526,000, much weaker than an expected pace of 580,000. The sales plunge in March combined with downward revisions in previous months makes the first quarter the worst yet for the housing downturn. Given the high inventory level and weakened demand, declines are expected to continue in the housing sector through this year though, at a gradually diminishing pace.
Jobless claims fell 33k to 342k for the week ending April 19. Even with the weekly drop, the level of claims remains elevated. In 2007, initial claims averaged 322k; thus far in 2008 claims have averaged 353k. Claims and their longer term averages suggest acceleration in the pace of layoffs and a downward trend in the pace of hiring.
Diminished rate cut expectations combined with scattered inflationary pressures have recently raised yields in the bond market which in turn resulted in higher mortgage rates this week. 30-year fixed rate mortgages averaged 6.03% this week compared to 5.88% last week according to Freddie Mac’s mortgage market survey.
FRIDAY, April 25th
Consumer sentiment dropped to 62.6% in April, a 26-year nadir, from 63.2% in mid-April and 69.5% in March. Consumers seem equally anxious about present and future economic circumstances. Sentiment is mired at a level that historically has been associated with recession. Downside risks to consumer attitudes remain in the form falling house prices, high energy prices, sluggish job growth and tighter credit.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12891.86 12849.36 +42.50 or +0.33%
NASDAQ 2422.93 2402.97 +19.96 or 0.83%
WEEK IN ADVANCE
The economic calendar is busy again in the coming week and provides the advance estimate for Q1 GDP as well as the first readings on payrolls, manufacturing and consumer spending starting off the second quarter. Also, the FOMC holds a two-day policy meeting, where a quarter-point rate cut is widely expected. The policy statement is due out Wednesday afternoon. Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

MONDAY, April 14th

MONDAY, April 14th
Retail sales gained 0.2% in March, driven by sales at gas stations, sporting goods stores, restaurants and bars. Weakness was concentrated in home-related product stores such as furniture, building materials and garden supplies. Even with the gain last month, longer term spending trends remain very weak as consumers cope with job losses, falling home values, high energy prices and tighter credit.
TUESDAY, April 15th
The producer price index jumped 1.1% in March, nearly twice consensus estimates, as food and energy prices surged during the month. Excluding food and energy prices, the core PPI rose 0.2% last month as expected. Over the past year the PPI surged 6.9% as core wholesale prices increased 2.8%, near a cyclical high. Looking ahead, inflationary pressures should recede under weak economic conditions.
The NAHB housing market index was unchanged at a level of 20 in April, the same as in March and February. The composition of the index components changed, though, with lower ratings for present single-family home sales while sales six months from now was tracking higher. Foot traffic through model homes increased as well. It may be some time before a recovery is staged but at least for now the index is not moving lower.
WEDNESDAY, April 16th
The consumer price index rose 0.3% in March, matching market expectations. A 1.9% increase in energy prices led the gain last month. Food price increases remained moderate. Over the past year consumer inflation has grown at a 4.0% rate. Excluding food and energy prices the core CPI was up 0.2% on the month and 2.4% on the year. Consumer inflation has eased slightly from the beginning of the year, giving the Fed leeway to adjust monetary policy as necessary.
The MBA mortgage applications index climbed 2.5% to 743.4% for the week ending April 11. All of the gain was a result of a 5.2% increase in refinance applications. Purchase applications declined 0.8% on the week. Refinancing activity is currently being supported by low rates but resurgence in purchase activity will need borrowers to meet higher loan standards and higher lender confidence.
Construction starts for new homes tumbled 11.9% in March to an annualized pace of 947,000. This was the first drop below a million units (at an annual rate) since 1991. Housing starts are down 36.5% over the past year. An outsized 24.6% decline in multifamily starts led the decline last month.
The Fed’s beige book survey indicated that the economy continued to weaken in March and early April. Labor markets, consumer spending, transportation and residential and commercial construction activity have all softened appreciably. Tourism, energy, agriculture and health services were positive contributors to growth. Loan demand decreased under tighter credit standards. Input cost increases were widespread but pass-through of these costs was limited. This report supports another rate cut, either 25 or 50 basis points as the Fed works to lessen the depth of a recession rather than contain the eruption of inflation.
THURSDAY, April 17th
The index of leading economic indicators rose 0.1% in March following five consecutive monthly declines. Weakness emanated from higher layoffs, lower stock prices, weak residential construction and building permits. Strength in the manufacturing components and money supply provided the offset. One monthly gain does not indicate full economic recovery however it can be taken to mean that the downturn may be less severe. The level of the index indicates slow and possibly contracting economic growth over the next six to nine months.
Jobless claims rose 17k to 372k for the week ending April 12. Claims remain elevated, illustrating softer labor market conditions and continued job losses. Expect the employment report for April to show another decline in payrolls.
FRIDAY, April 18th
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12849.36 12325.42 +523.94 or +4.25%
NASDAQ 2402.97 2290.24 +112.73 or +4.92%
WEEK IN ADVANCE
With few signs of housing’s recovery evident, new and existing home sales will be of the most interest in the coming week. Along with data flows the Fed will be watching the financial markets before making their move at the end of the month.

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

MONDAY, April 14th

MONDAY, April 14th
Retail sales gained 0.2% in March, driven by sales at gas stations, sporting goods stores, restaurants and bars. Weakness was concentrated in home-related product stores such as furniture, building materials and garden supplies. Even with the gain last month, longer term spending trends remain very weak as consumers cope with job losses, falling home values, high energy prices and tighter credit.
TUESDAY, April 15th
The producer price index jumped 1.1% in March, nearly twice consensus estimates, as food and energy prices surged during the month. Excluding food and energy prices, the core PPI rose 0.2% last month as expected. Over the past year the PPI surged 6.9% as core wholesale prices increased 2.8%, near a cyclical high. Looking ahead, inflationary pressures should recede under weak economic conditions.
The NAHB housing market index was unchanged at a level of 20 in April, the same as in March and February. The composition of the index components changed, though, with lower ratings for present single-family home sales while sales six months from now was tracking higher. Foot traffic through model homes increased as well. It may be some time before a recovery is staged but at least for now the index is not moving lower.
WEDNESDAY, April 16th
The consumer price index rose 0.3% in March, matching market expectations. A 1.9% increase in energy prices led the gain last month. Food price increases remained moderate. Over the past year consumer inflation has grown at a 4.0% rate. Excluding food and energy prices the core CPI was up 0.2% on the month and 2.4% on the year. Consumer inflation has eased slightly from the beginning of the year, giving the Fed leeway to adjust monetary policy as necessary.
The MBA mortgage applications index climbed 2.5% to 743.4% for the week ending April 11. All of the gain was a result of a 5.2% increase in refinance applications. Purchase applications declined 0.8% on the week. Refinancing activity is currently being supported by low rates but resurgence in purchase activity will need borrowers to meet higher loan standards and higher lender confidence.
Construction starts for new homes tumbled 11.9% in March to an annualized pace of 947,000. This was the first drop below a million units (at an annual rate) since 1991. Housing starts are down 36.5% over the past year. An outsized 24.6% decline in multifamily starts led the decline last month.
The Fed’s beige book survey indicated that the economy continued to weaken in March and early April. Labor markets, consumer spending, transportation and residential and commercial construction activity have all softened appreciably. Tourism, energy, agriculture and health services were positive contributors to growth. Loan demand decreased under tighter credit standards. Input cost increases were widespread but pass-through of these costs was limited. This report supports another rate cut, either 25 or 50 basis points as the Fed works to lessen the depth of a recession rather than contain the eruption of inflation.
THURSDAY, April 17th
The index of leading economic indicators rose 0.1% in March following five consecutive monthly declines. Weakness emanated from higher layoffs, lower stock prices, weak residential construction and building permits. Strength in the manufacturing components and money supply provided the offset. One monthly gain does not indicate full economic recovery however it can be taken to mean that the downturn may be less severe. The level of the index indicates slow and possibly contracting economic growth over the next six to nine months.
Jobless claims rose 17k to 372k for the week ending April 12. Claims remain elevated, illustrating softer labor market conditions and continued job losses. Expect the employment report for April to show another decline in payrolls.
FRIDAY, April 18th
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12849.36 12325.42 +523.94 or +4.25%
NASDAQ 2402.97 2290.24 +112.73 or +4.92%
WEEK IN ADVANCE
With few signs of housing’s recovery evident, new and existing home sales will be of the most interest in the coming week. Along with data flows the Fed will be watching the financial markets before making their move at the end of the month.

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending April 11, 2008

MONDAY, April 7th
Consumer credit rose by $5.16 billion to $2.54 trillion in February, according to Federal Reserve data released today. Consumer credit in January was upwardly revised to $10.29 billion from $6.9 billion in the original estimate. February credit growth was led by gains in the revolving credit category as consumers used credit cards to fund consumption. Consumer credit will be worth watching as a spending gauge as consumers contend with slumping housing markets, high energy prices and slow job growth.
TUESDAY, April 8th
The pending home sales index fell to 84.6% in February from a level of 86.2% in January. The index, which tracks contracts signed, was down 1.9% on the month and off 21.4% over the last year. The slight decline in the index in February suggests that there will be little change in the pace of existing home sales over the next few months. The chief economist at NAR said it could be summertime before sales start to improve and later in the year before any sustainable increases.
Deciding on monetary policy was difficult for the FOMC on March 18 due to uncertainties in the economic outlook, financial market stress and somewhat elevated inflation. Committee members were unsure if monetary policy alone would be enough to address contracting growth, house price declines, soft labor markets and financial market turmoil related to credit losses. The vote was 8-2 in favor of a 75 basis point rate cut with members agreeing that more time would be needed to assess the effects of monetary policy easing to date.
WEDNESDAY, April 9th
The MBA mortgage applications index increased 5.4% to 725.6% for the week ending April 4. The purchase index was up 8.1% on the week but remains 7.0% lower than a year ago. The refinance index gained 3.4% on a weekly basis and is 35.2% higher from one year ago. Rates were little changed, remaining quite low in the last week which continued to support application activity.
Easing expectations for a larger rate cut this month have climbed back up as many sources, including the IMF, Bloomberg and several Fed officials continue to forecast very weak economic growth for the U.S. this year. Fed funds futures traders were pricing in a 40% chance the Fed will lower rates by 50 basis points to 1.75% when they meet at the end of the month. Odds were running at about 12% for a half point rate cut just one week ago. It is still widely expected for the Fed to cut at least a quarter point at the next policy meeting.
THURSDAY, April 10th
The international trade deficit widened to $62.3 billion in February from a shortfall of $59.0 billion in January. Imports increased more than exports in February, accounting for the larger deficit. Export growth continues to be supported by the weak dollar. Surprisingly, import gains were driven by non-petroleum goods as petroleum imports actually declined. The larger trade deficit will detract from Q1 GDP.
Jobless claims plunged 53k to 357k for the week ending April 5. Even with the decline, the 4-week moving average was up 3k to 376k, the highest level since the aftermath of Hurricane Katrina. Claims levels remain elevated indicating an upward trend in layoffs combined with a moderate pace of hiring. Labor market conditions remain weak.
Chain store sales fell 0.5% in March, hurt by an early Easter, cold weather and weak economic conditions. An early Easter holiday will shift some sales into April, however, weak economic fundamentals will continue to weigh on consumer spending going forward with tax rebate checks perhaps providing some relief starting in May.
FRIDAY, April 11th
The import price index jumped 2.8% in March pushing the year-over-year gain to 14.8%. The oversized gain reflects the rebound in crude oil prices last month though non-petroleum prices posted a record high increase as well. Imported petroleum prices surged by 9.1% in March and have climbed 60% over the past year. Consumer and producer prices for March, due out next week, will likely show large gains related to higher energy prices.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12325.42 12609.42 -284.00 or -2.25%
NASDAQ 2290.24 2370.98 -80.74 or -3.40%
WEEK IN ADVANCE
A boatload of economic data in the coming week should help solidify the interest rate outlook. Key indicators include retail sales, housing starts, and consumer and producer prices. Also, the Fed’s beige book could provide some insight on their next policy decision.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco