Economic Highlights for the Week Ending August 17th, 2007

Monday, August 13th
Moves by foreign and domestic central banks to increase liquidity last week in the face of credit market distress increased the odds of a fed rate cut substantially. Fed funds futures traders are pricing in a 56% chance for a rate cut at the next meeting in September to ensure that the flow of credit does not dry up. Markets are looking for a second rate cut as well by the end of the year.
Retail sales rose 0.3% in July after tumbling in June as consumers spent in department stores, restaurants and on apparel and accessories. Consumers cut spending on gasoline and cars however, because excluding motor vehicle sales, retail sales posted a stronger gain of 0.4%. The July levels of consumer spending are well above their Q2 averages which will help to drive solid economic growth in Q3.
Tuesday, August 14th
The producer price index rose 0.6% in July and showed that prices across all stages of processing were up more than anticipated. As expected, core prices -less food and energy – rose 0.1%. Producer prices are up 4% in the past year, while core prices are up 2.3%, marking the biggest gain in nearly two years.
The international trade deficit narrowed to $58.1 billion in June, while the May deficit was revised down slightly to $59.2 billion. Three major factors influence the trade deficit: energy prices, strong global economic growth and a weakening dollar. Elevated oil prices are due to distortions in oil supply and geopolitical risk. The current price, although lower than the record highs in 2006, is high compared to historic averages.
Wednesday, August 15th
The consumer price index rose 0.1% in July in line with estimates and related to a reprieve in energy price gains. Excluding food and energy prices from the index, core consumer prices rose 0.2% last month to bring the annualized gain to 2.2%, still a bit higher than the Fed would like to see but definitely lower than a cyclical high of 2.9% reached in September 2006. Easing inflationary pressures give the Fed room to move should they decide to cut rates sometime this year.
The MBA mortgage applications index rose 3.4% to 678.7% for the week that ended August 10. Both purchase and refinance indexes increased last week. Application activity overall remains 20% higher than its year ago level. Mortgage rates have declined somewhat in recent weeks and may account for the recent surge in application activity; however it could be related to multiple applications being filed rather than an increase in sales or refinance activity.
The NAHB housing market index fell 2 points in August to a level of 22. This is a new cyclical low and the second lowest reading on record since the index began in 1985. Builders rated present single family sales lower while projecting lower sales six months from now. Foot traffic through model homes also fell to its lowest level ever. Tighter lending standards, higher mortgage rates and rising defaults continue to pressure new home sales with builders unable to work off high inventory levels. Economists say that the bottom in the housing correction has yet to be reached and project that recovery in the sector could be as far off as the middle of next year.
Thursday, August 16th
Housing starts tumbled 6.1% in July to a rate of 1.38 million. New construction starts have slowed 20.9% over the last year under faltering sales and tighter credit. Both single family and multifamily starts declined last month. Building permits which are often used as a proxy for future new starts activity fell 2.8% to 1.37 million. Sinking permit issuance, dour home builder sentiment, bloated inventories, weakened demand and tighter credit all point toward further contraction in the home building business. Housing's contribution to economic growth will be substantially negative again in Q3 and probably Q4 as well.
Mortgage rates edged higher in the past week as Treasury prices settled down after a huge run-up related to credit market woes and equity decline. 30-year fixed rate mortgages averaged 6.62% this week compared to 6.59% last week according to Freddie Mac’s mortgage market survey. Economists at Freddie Mac stated today that problems in the non-prime sector have not yet affected the prime conforming market.
Friday, August 17th
The Fed cut the discount rate, the rate at which the Fed loans money to banks, by 50 basis points today in an effort to bring some order to recent gyrations in the financial markets. The Fed also said that downside risks to economic growth have heightened and that they are prepared to take further action if necessary.

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