Economic Highlights for the Week Ending July 20, 2007

Monday, July 16th
Fears of subprime repercussions on the broader economy increased the possibility of a fed rate cut by year end. Consumer spending, a primary driver of economic activity, has also faltered on weaker housing markets. While no rate change is expected at the next two meetings in August and September, a slight 15% chance of a rate cut is being priced in for the October meeting up from no chance a few weeks ago.
Tuesday, July 17th
The producer price index fell 0.2% in June following an oversized 0.9% gain in May. The unexpected decrease was related to falling food and energy prices. Gasoline prices fell 3.9% last month. Excluding food and energy from the index, core producer price rose 0.3% on the month and rose 1.8% on the year, still within the Fed’s target zone for inflation.
Industrial production rose 0.5% in June on a robust 0.6% gain in manufacturing output. Utilities and mining output also gained 0.3% and 0.5% respectively. Stronger output pushed capacity utilization higher to 81.7% from 81.4% in May. These data confirm a strong second quarter rebound with tighter resource utilization.
The NAHB housing market index sank to 24 in July from a level of 28 in June. Home builders rate present single family sales and sales six months from now much lower while foot traffic through model homes decreased. Such a low level of home builder sentiment portends weaker new home construction and sales in the months ahead.
The Federal Reserve in conjunction with state authorities announced a plan today to regulate subprime mortgage lenders by conducting compliance reviews to uncover possible abuses in subprime lending practices. Regulators will analyze underwriting standards and cross reference them against consumer protection laws and take enforcement actions where necessary. The pilot program, targeting about a dozen lenders will begin in the fourth quarter of this year.
Wednesday, July 18th
The consumer price index increased 0.2% in June on a 0.5% decline in energy prices. Excluding food and energy from the index, core consumer prices rose 0.2% on the month to bring the yearly gain to 2.2%. The annual gain in the core rate is still out of the Fed’s comfort zone but it has receded somewhat in the past few months.
Housing starts increased 2.3% to 1.467 million in June. Single family starts declined 0.2% to 1.151 million while multifamily starts surged 12.9% to 281,000. Permit issuance, often used as a proxy for future building activity, fell 7.5% to 1.406 million. New construction activity is expected to decline further in coming months as the housing market continues its search for the bottom.
The MBA mortgage applications index fell 0.9% to 631.6% for the week that ended July 13. The purchase index slipped 1.6% while the refi index gained 4.9%. Application activity remains healthy but its direct correlation to actual sales and refinancing appears to be tenuous during this housing market correction.
Thursday, July 19th
Mortgage rates were little changed this week on contained inflation expectations. Both core consumer and producer price gains over the last year were moderate. Chairman Bernanke indicated in testimony this week that the Fed expects inflation to continue to moderate further from here. 30-year fixed rate mortgages averaged 6.73% this week, the same as last week according to Freddie Mac's mortgage market survey.
Jobless claims fell 8k to 301k for the week that ended July 14. The low level of claims suggests healthy labor market conditions but with a slightly weaker pace of hiring this year compared to 2006 trends.