Economic Highlights for the Week Ending August 3, 2007

Monday, July 30th

Bargain hunters were out Monday snapping up shares after last week's severe sell off. Investors, rotating back into stocks, showed interest in financials, homebuilders and retailers. Merger activity provided some lift but some deals stalled due to the credit crunch. Stocks rallied in the afternoon to end higher on the day. The Dow was up 92.84 to 13358.31. The NASDAQ gained 21.04 to 2583.28.
Tuesday, July 31st
Personal income rose 0.4% in June, less than an expected 0.5% gain. Consumer spending increased only 0.1% during the month due to soft retail and motor vehicle sales. A closely watched inflation gauge contained in this data series, the core PCE price index, gained just 0.1% on the month and 1.9% on the year. The annual gain in the price index is within the Fed's preferred range for inflation.
The consumer confidence index shot up 7.3 points in July to 112.6%. This is the highest confidence reading since August 2001. Ratings of both the present situation and expectations for the future increased substantially. Surprising given higher gas prices, modest job creation and stagnant house price appreciation.The monthly surge in confidence is welcome; however downside risks remain in the near term.
The employment cost index rose 0.9% in Q2 as benefit costs surged and wage gains fell mildly from the first quarter. For the year ending in June total compensation increased 3.3% up from a 3.0% gain in Q1.
Construction spending fell 0.3% in June compared to expectations for a 0.2% increase. This was the first decline in the past five months. Residential construction weakness continues to weigh on overall spending. In June, public construction and the nonresidential category provided little offset. There is little indication that residential weakness will abate soon.
Wednesday, August 1st
The ISM manufacturing index fell 2.2 points in July to 53.8%. Expectations were for a reading of 55.5%. Manufacturers kept the lid on inventories, which fell for the twelfth consecutive month. Because of the correlation to GDP growth, if these data maintain through September, it would indicate slower growth in Q3 than experienced in Q2.
Vehicle sales slipped in July, to a pace of 15.5 million units. The figures point to weakening credit quality, restrained employment trends and ascending fuel prices as probable causes for softness in sales.
The MBA mortgage applications index fell 0.3% to 607.1% for the week ending July 27. Despite a seven week decline, mortgage applications were 15.1% above a year ago.
Thursday, August 2nd
Sharply lower yields in the bond market placed downward pressure on mortgage interest rates this week however long term mortgage rates only edged down slightly. Bond yields have been tumbling lately as the subprime fallout drove investors into safer Treasury securities. 30-year fixed rate mortgages averaged 6.68% this week compared to 6.69% last week according to Freddie Mac's mortgage market survey.
Jobless claims rose 4k to 307k for the week ending July 28. Initial claims have settled into a relatively low and narrow range implying on-trend payroll creation and fairly tight labor market conditions.
Friday, August 3rd
Payroll employment increased 92k in July, less than an anticipated gain of 130k. Moreover, the prior two months were revised lower for 8k net fewer jobs. In July, strong service sector job growth was partially offset by job losses in government, manufacturing, and construction industries. Hourly earning rose 0.3%, in line with expectations while unemployment edged 0.1% higher to a 4.6% rate. These data point to a gradual softening of labor market conditions without significant wage pressures. Lack of inflation warnings and mild growth will keep the Fed on hold in the foreseeable future.


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