Economic Highlights for the Week Ending September 1, 2006

Monday, August 28th
Fed funds futures traders are pricing about a 16% chance the Fed will tighten September 20 and roughly a 35% chance policy makers will raise the fed funds rate to 5.50% by the end of the year. A busy data week lies ahead with significant releases on manufacturing, payrolls, and revised Q2 GDP that could change the interest rate outlook.
Tuesday, August 29th
The consumer confidence index tumbled 7.4 points in July to a level of 99.6%, the largest decline since Hurricane Katrina. Expectations were for a more modest decline to a level of 102.5%. The present situation index plunged 10.8 points to its lowest level of the year as the expectations index, down 5.1 points, continued to trend lower. The sharp decline in confidence is a reflection of higher oil prices, softening labor and housing markets and ongoing turmoil in the Middle East.
The minutes to the August 8 FOMC meeting revealed that a pause in tightening was a close call but ultimately, the Fed did not want over tighten. Policy makers felt that more firming could be needed but they wanted to hold rates steady in order to better assess the effects the last 17 rate hikes were having on the economy and inflation.
Wednesday, August 30th
GDP was upwardly revised to an annual rate of 2.9% in the second quarter from the original estimate of 2.5%. Business and consumer spending were better than first thought while residential investment fell at a faster pace than in the earlier reading. Economy-wide inflation was unchanged at 3.3%. The economy has grown at a solid 3.6% rate over the last four quarters.
The MBA mortgage applications index slipped 0.9% to 556.5% for the week that ended August 25. Mortgage rates have been on a gradually declining trend since the middle of last year and are now 23.0% below their year ago level. For the week, the purchase index fell 1.6% while the refinance index remained unchanged.
Thursday, August 31st
Personal income rose 0.5% in July, as expected. Over the past year personal income has been trending higher, growing by a strong 7.1%. Consumer spending increased 0.8% during the period, led by motor vehicle purchases and services spending. A pick up in spending was accompanied by softer inflation. A closely watched inflation gauge contained in this data series, the core PCE deflator rose 0.14% on the month and 2.4% on the year. The annual gain remains high but it has stopped accelerating.
Jobless claims fell 2k to 316k for the week that ended August 26. Jobless claims were little changed this week and have stabilized. The level of claims is consistent with moderate payroll gains.
Mortgage rates eased again this week on reduced rate hike expectations. 30-year fixed rate mortgages averaged 6.44% this week compared to 6.48% last week according to Freddie Mac's mortgage market survey. Mortgage rates remain historically low which many are hoping will result in a soft landing for the cooling housing market.
Friday, September 1st
Payroll employment increased 128k in August matching economists' expectations. Moderate payroll growth was accompanied by softer wage gains as well. Average hourly earnings rose just 0.1% last month compared to an expected 0.3% gain. The unemployment rate eased to 4.7% of the workforce from 4.8% in the previous month. These data combined with other evidence of slowing economic conditions and contained inflationary pressure will help to sway the Fed to remain on hold possibly through the remainder of this year.
Construction spending tumbled 1.2% in July compared to expectations for a 0.1% increase. Moreover, the previous two months were downwardly revised. Private construction expenditures fell 1.3% led by a 2.0% drop in the residential segment. This is the fourth monthly decline in residential building which is off 3.0% year over year.
The ISM manufacturing index slipped to 54.5% in August from 54.7% in July. The level of the index suggests manufacturing activity nationwide continues to expand at a solid pace albeit slightly slower than in 2005. Expansion in the sector is expected to continue through this year and into next.