Economic Highlights for the Week Ending November 17, 2006

Monday, November 13th

Rate cut expectations have been tabled until later next year. A busy economic calendar will help refine the outlook this week starting with the producer price index and retail sales data tomorrow.
Tuesday, November 14th
Retail sales fell 0.2% in October better than an expected 0.4% decline. September sales were downwardly revised to show a decline of 0.8%. Weakness was led by a 6.0% drop in gasoline sales attributable to price declines in the past two months. The slowing housing market is also weighing on retail sales with declines in the categories of furniture/home furnishings and building materials/garden supplies.
The producer price index fell 1.6% in October, much more than expected as energy costs tumbled 5.0%. Excluding food and energy prices, the core PPI fell 0.9%, its steepest drop in more than 13 years, because of a sharp plunge in motor vehicle prices. Wholesale inflation has fallen 1.5% over the past year while the core rate gained just 0.7%, well within the range the Fed deems acceptable.
The NAR predicts the housing slowdown to continue into next year. NAR chief economist David Lereah forecasts a 12% drop in housing starts to a rate of 1.63 million for 2007. Housing starts will likely fall 11% this year. New home sales are expected to fall 8.7% next year to 975,000 after dropping 17% this year. Existing home sales will probably fall 0.6% to 6.43 million next year after falling 8.6% this year. Median prices for existing homes are projected to rise 1.7% in 2007 while new home prices are expected to gain 1.3%.
Wednesday, November 15th
The MBA mortgage applications index rose 4.3% to 647.5% for the week that ended November 10. The purchase index rose 2.7% last week while the refinance index jumped 6.5%. Refinancing volume is 18.8% above its year ago level mainly due to homeowners converting their adjustable rate mortgages and locking in relatively low, fixed rates.
Thursday, November 16th
Consumer inflation fell for the second straight month because of energy price declines. The consumer price index fell 0.5% in October, deeper than an expected decline of 0.3% as energy prices tumbled 7.0%. The CPI has gained a modest 1.3% over the past year while energy prices fell 11.2%. Excluding food and energy from the index, the core CPI gained 0.1% on the month and 2.7% in the last year, improved somewhat but still elevated.
The NAHB housing market index increased 2 points in November to a level of 33. Its second straight monthly increase follows eight months of sharp declines. Homebuilders are feeling a bit better and rated present sales and sales six month from now higher while the traffic through model home increased. Nevertheless the level of the index remains low buts its improvement could point to more stable housing market conditions in coming months.
Mortgage rates fell this past week in tandem with a strong bond market rally that lowered yields significantly. Bond market gains were made on signs of slower economic growth containing inflation. 30-year fixed rate mortgages averaged 6.24% this week compared to 6.33% last week according to Freddie Mac's mortgage market survey. The decline in mortgage rates combined with slightly improved homebuilder sentiment and strong mortgage application activity all point to an upcoming moderation in housing market slowdown.
Friday, November 17th
New residential construction starts in October fell to their lowest level since July of 2000 despite tentative signs of stabilizing housing market conditions. Housing starts plunged 14.6% last month to a rate of 1.49 million. Expectations were centered on a more modest decline to a rate of 1.68 million. The steep decline in housing starts last month will likely detract from third quarter and possibly fourth quarter economic growth. Near term downside risks aside, the abrupt slowing in new starts will help to reduce large inventories of new homes more rapidly resulting in a rebound in residential investment sooner rather than later.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12342.56 12108.43 +234.13 or +1.93%
NASDAQ 2445.86 2389.72 +56.14 or +2.35%

WEEK IN ADVANCE
A quiet holiday shortened week will provide little fodder to digest with regards to the interest rate and economic outlook. Data releases pick up in the post holiday week with one more FOMC meeting left in mid-December, as the financial markets head into year's end.

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

Economic Highlights for the Week Ending November 10, 2006

Monday, November 6th
The interest rate outlook ran the gamut last week with weak data at the start increasing rate cut expectations substantially and the employment report Friday replacing that with an on hold scenario through the first quarter of 2007. Fed funds futures traders are fully pricing in a stable fed fund target rate of 5.25% through January and less than 20% odds of a rate cut at the March FOMC meeting.
Tuesday, November 7th
Two major homebuilders, Toll Brothers and Beazer Homes reported order declines of more than 50% in their latest fiscal quarters. Both builders continued to struggle with high inventories, slower demand for new homes, sharply higher cancellation rates and steep discounting. More evidence of slowing housing market conditions and its impact on the broader economy will continue to place downward pressure on rates.
Consumer credit outstanding fell $1.2 billion in September driven primarily by a $4.1 billion decline in non-revolving credit, which is comprised mostly of car loans. Revolving credit or credit cards increased $2.9 billion during the month. Cash-out refinancing boosted by a drop in rates over the summer, continues to limit consumer credit balances. As the housing market slows in coming months, consumers may again turn to revolving credit usage to support spending.
Wednesday, November 8th
The MBA mortgage applications index jumped 8.8% to 620.9% for the week that ended November 3. The purchase index surged 7.1% on a recent drop in mortgage interest rates. The refinance index surged 11.0% as homeowners moved to lock in fixed mortgage rates. Purchase application volumes remain 13.6% below year ago levels but refinancing activity is actually up 5.5% over last year.
Thursday, November 9th
Import prices tumbled 2.0% for the second straight month in October, more than double estimates. The outsized decline last month was again led by falling petroleum prices which were down 8.3% in October after a 9.7% decrease in September. Excluding petroleum, import prices still fell 0.6% on the month. Import price declines bode well for upcoming consumer and producer price reports.
The international trade deficit on goods and services fell 6.8% in September to $64.3 billion from a record high of $68.96 billion in August. The improvement in the trade gap was due to less expensive crude and lower import oil volumes during the month. Lower energy prices should help limit the growth in the trade deficit in coming months. A narrower than expected trade gap in September will likely result in an upward revision to third quarter GDP growth.
Consumer sentiment fell 1.3 points to 92.3% in its preliminary reading for November. The slight drop in sentiment followed sharp gains in the prior two months which arrested the downward trend in sentiment that had been in place over the last two years. It appears that as gasoline prices have stabilized so have consumer attitudes. The final reading for November sentiment will be released in two weeks.
Jobless claims fell 20k to 308k for the week ending November 4. Lower than expected unemployment filings last week indicate relatively tight labor market conditions and stable, if moderate pace of hiring.
Mortgage rates drifted higher this week on evidence of underlying strength in recently released economic data. 30-year fixed rate mortgages averaged 6.33% this week compared to 6.31% last week according to Freddie Mac’s mortgage market survey. Slow economic growth in the current quarter has kept a lid on interest rate gains. Economists at Freddie Mac expect fourth quarter growth to rebound moderately although the increase is expected to come from sectors of the economy other than housing.
Friday, November 10th
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12108.43 11986.04 +122.39 or +1.02%
NASDAQ 2389.72 2330.79 +58.93 or +2.53%
WEEK IN ADVANCE
A full economic calendar next week yields the latest data on inflation, consumer spending, manufacturing and new home construction starts. Data results will be weighed against current outlook for economic slowing and possible rate cuts next year.

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

Economic Highlights for the Week Ending November 3, 2006

Monday, October 30th
Personal income rose 0.5% in September, better than expected, led by a healthy 0.5% gain in wages and salaries. Personal consumption increased just 0.1% last month but gained 5.5% year-over-year which is in line with longer term averages. A closely watched inflation gauge contained in this data series the core PCE deflator gained 0.2% on the month and 2.4% on the year, which is higher than the 1-2% range the Fed would like to see.
Tuesday, October 31st
Consumer confidence fell a half a point to 105.4% in October from a revised reading of 105.9% in September. The weaker than expected reading was due to lower ratings of current conditions and the job market. Consumer expectations gained modestly. Confidence levels are expected to remain range bound in the near term with downside risk associated with slower job growth and housing market declines.
More weak economic readings today increased rate cut expectations for March of next year. While fed funds futures traders expect no change in rates through the FOMC meeting in late January, odds of a rate cut in the fed funds target to 5.0% at the March meeting are currently being priced in at 73%.
Wednesday, November 1st
The ISM manufacturing index fell to 51.2% in October from 52.9% in September. Manufacturing activity has slowed considerably over the past six months or so. New orders and production fell which does not bode well for future activity. Prices dropped off during the month alleviating inflation concerns. It looks as though the Fed's forecasts of slowing economic conditions containing inflation are on the mark and will open up the possibility of a rate cut sooner rather than later.
Motor vehicle sales fell 2.8% in October to an annual rate of 16.2 million, roughly in line with expectations. The pace of vehicle sales remains anemic. Production schedules will be cut again in Q4 as automakers contend with rising inventories and weak earnings. Weak auto sales and production are likely to detract from Q4 GDP growth.
Construction spending fell 0.3% in September, lower than expected. The decline was led by a 1.1% drop in residential construction. Total construction expenditures are 2.9% higher than a year ago while residential construction is down 6.9% during the same period.
The MBA mortgage applications index fell 3.0% to 570.8% for the week that ended October 27. The purchase index was down 1.8% on the week while refinancing applications declined 4.5%. After falling sharply between mid 2005 and mid 2006, application activity appears to have stabilized in the last three months, suggesting the sharp downturn in housing activity could subside in the months ahead.
The pending home sales index fell 1.1% in September after increasing 4.7% in August. The index tracks signed sales contracts and is considered a leading indicator of existing home sales. Despite recent volatility, the index has improved in the last two months due to lower rates and softer home prices. Improved fundamentals will continue to support home turnover at current levels in the coming months.
Thursday, November 2nd
Productivity was flat in the third quarter compared to expectations for a 1.2% gain. Over the past year, productivity has increased just 1.3% decelerating sharply in recent quarters. Unit labor costs increased 3.8% on the quarter, higher than expected but downshifted from 5.4% growth in the second quarter.
Friday, November 3rd
Payrolls increased by just 92k in October, missing estimates for a 130k gain. However, upward revisions in the previous two months resulted in a net increase of 139k additional jobs. Even with the revisions, job growth is trending lower in the past year. Hourly earning rose 0.4% on the month, higher than expected. The yearly gain of 3.9% in hourly earnings is also on the high side. The unemployment rate dropped to 4.4% of the workforce which indicates fairly tight labor market conditions.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11986.04 12090.26 -104.22 or -0.86%
NASDAQ 2330.79 2350.62 -19.83 or -0.84%

WEEK IN ADVANCE
Rate cuts are off the table based on data showing underlying economic strength with increasing inflationary pressures. The financial markets will likely adopt a 'wait and see' mode in the coming

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