Economic Highlights for the Week Ending June 6, 2008

MONDAY, June 2nd
It is widely expected for the Fed to remain on hold at the June 24-25 FOMC meeting. Just how long the Fed will remain on hold is another matter as policymakers try to juggle weak economic conditions with rising inflation. Traders believe there is a 60% chance the Fed will start to unwind policy easing as soon as December. The trajectory of the data between now and then will nail things down more precisely.
Construction spending faltered again in April, based on weakness in the residential sector however, overall spending declines were slightly less than expected. Construction spending fell 0.4% in April compared to an expected 0.6% decline. With nonresidential construction spending more volatile and budget strains on state and local governments affecting public sector spending, overall construction spending is expected to remain weak through this year and the first part of 2009.
The ISM index increased to 49.6% in May from a 48.6% reading in April. The level of the index suggests that manufacturing activity nationwide continued to contract last month but at a slower pace than in previous months. An index reading over the 50% level indicates expansion in the sector. Details in the data showed still weak employment, slightly improved production and higher input prices.
TUESDAY, June 3rd
Fed Chairman Ben Bernanke, in remarks to the International Monetary Conference, said that the Fed is aware of the implications of changes in the value of the dollar on inflation and will work with the Treasury to monitor foreign exchange markets. The Chairman was referring to the 16% drop in the dollar against the euro in the past year and its impact on inflation. Bernanke also signaled that the FOMC is done with policy easing for now and that interest rates are well positioned to promote growth and stabilize prices.
WEDNESDAY, June 4th
The MBA mortgage applications index fell 15.3% to 502.3% for the week ending May 30. Purchase application volume remains soft dropping 5.4% on the week to bring the yearly decline to 23.1%. The refinance index plunged 25.7% last week in response to higher rates. With this decline, refinancing activity is down 14.9% from its year ago level. Application activity for both refis and purchases is trending lower under weak home sales and tougher loan standards.
The ISM non-manufacturing index slipped to 51.7% in May from a level of 52.0% in April. A reading over the key 50% level indicates expansion in the service sector. Construction, government, financial and other service industries grew moderately last month amid rising price pressures and declining employment. Given residential construction weakness and turmoil in the mortgage market, service sector activity is expected to remain soft going forward.
THURSDAY, June 5th
Chain store sales rose 3.0% in May from May of a year ago, on a same-store basis according to the ICSC index. May’s stronger-than expected gain led by sales at wholesale, discount and drug stores. Sales at apparel and department stores declined sharply. Consumers are spending, albeit cautiously as they contend with high gas prices, debt burdens, falling home values and weak job growth.
Jobless claims decreased 18k to 357k for the week ending May 31. The decline could be related to the Memorial Day holiday. The pace of layoffs remains elevated but has stopped accelerating indicating soft labor market conditions.
FRIDAY, June 6th
Payroll employment declined by 49,000 jobs in May compared to an estimated 60,000 drop. This was the fifth consecutive decline in payrolls for a total job loss of 324k since the first of the year. Weakness was broad based with only education, health services, leisure, and government sectors of the economy adding to the payrolls. The unemployment rate jumped to 5.5% in May from 5.0% in April due to a large increase in the workforce combined with sub-par job creation.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12209.81 12638.32 -428.51 or -3.39%
NASDAQ 2474.56 2522.66 -48.10 or -1.91%
WEEK IN ADVANCE
The employment report pushes back the timetable for when the Fed will be able to start raising rates. Inflation remains the wild card if it does not ease under slower economic conditions. The consumer price index due out Friday in the coming week will identify the current level of consumer inflation.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco