ECRI Weekly Leading Index 133.50 -.67%The Trade Deficit for May shrank to -$55.3B versus estimates of -$57.0B and -$56.9B in April. The US trade deficit unexpectedly narrowed in May as imports of oil, other industrial materials and capital goods fell while exports hit an all-time record. The deficit with China widened to $15.8 billion, which is 29% of the entire US deficit. The numbers for April and May point to a narrower deficit in the second quarter, which should help add to 2Q GDP growth for the first time in 2 years. "It's good news, clearly," said Richard DeKaser, chief economist at National City.
The Import Price Index for June rose 1.0% versus estimates of a 1.0% increase and a 1.0% decline in May. Prices of imported goods other than petroleum declined .4% in June, the most in more than two years. This suggests US companies will continue to struggle to raise prices due to foreign competition. "All the inflation that we're seeing is in energy prices," said Wesley Beal, chief US economist at IDEAglobal.com. "For just the last two months, core prices in import prices and producer prices and consumer prices have been okay," Beal said. "Inflation expectations see well contained" and economic growth appears "fairly solid," the Fed's Lacker said.
The US Monthly Budget Surplus for June rose to $23.0B versus estimates of $22.4B and -$19.1B in May. White House budget officials cut their estimate for this year's deficit to $333 billion as rising tax receipts are soaring from growth in jobs, income and corporate revenue. This mid-year estimate is $94 billion less than February's forecast. The report is "a sign our tax relief plan, our pro-growth policies are working," President Bush said. The $333 billion would represent only 2.7% of GDP, the Office of Management and Budget said. Based on the current trend, the deficit would narrow to 1.1% of GDP by 2009, the OMB said. Tax payments in late April and May have been running $1 billion a day ahead of last year's pace, Bloomberg reported. "Tax revenue has turned around very quickly," said Wesley Beal. "I would expect the deficit to come in even more favorably than that. They are giving themselves an easy bar to clear," said Beal. The OMB is now predicting US tax revenue will rise 14% from last year, the largest annual gain in 25 years.
The CPI for June was unchanged versus estimates of a .2% increase and a .1% gain in May. The CPI Ex Food & Energy for June rose .1% versus estimates of a .2% increase and a .1% gain in May. US consumer prices were unchanged in June as companies discounted products such as clothing and cars to boost sales. Consumer prices were up 2.5% for the 12 months ended in June. The cost of all goods including cars, apparel and food fell .2% last month. "Even with rising energy prices, inflation remains historically low and the US should "enjoy price stability over the next few years," said Ben Bernanke, Greenspan's likely replacement.
Advance Retail Sales for June rose 1.7% versus estimates of a 1.0% gain and a .3% decline in May. Retail Sales Less Autos for June rose .7% versus estimates of a .6% increase and unchanged in May. US retail sales rose a greater-than-expected 1.7% in June, led by spending on cars, furniture and gasoline. Retail sales account for about half of all consumer spending. "Consumers are spending more than I would have imagined," said Lyle E. Gramley, a former Fed governor. "Consumer spending growth is going to continue to be as steady as it has been," said Jeffrey Lacker, president of the Federal Reserve Bank of Richmond. "Income growth is holding up pretty well."
Initial Jobless Claims for last week rose to 336K versus estimates of 322K and 320K the prior week. Continuing Claims rose to 2617K versus estimates of 2600K and 2572K prior. The number of US workers filing jobless claims rose to 336,000 last week, reflecting a temporary shutdown of auto plants. The four-week moving average of claims rose to 320,750 from 320,500. The insured employment rate, which tracks the US jobless rate, rose to 2.1%. "Looking at these underlying trends, the labor market seems to be pretty healthy," said Stephen Gallagher, chief US economist at Societe Generale.
Empire Manufacturing for July rose to 23.9 versus estimates of 10.0 and a reading of 10.5 in June. Empire Manufacturing unexpectedly rose in July to its highest level this year as orders picked up and inventories shrank. The optimism component of the index for the next 6 months rose to 47 from 34 in June. The current orders index rose to 19.2, the highest since January. The measure of current shipments increased to 20.9 from 1 in June. The gauge of prices paid for materials fell to 21.6 in July, the lowest since December 2003. The index of expected prices paid six months from now fell to 28.4 from 44.4. Finally, the index of hiring expectations over the next six months rose to 23.9 this month from 14.7 in June. "Manufacturing has turned the corner and appears to have completed the inventory adjustments that needed to be made," said Wesley Beal. "Production, orders and cash flow should pick up strongly in the third quarter now that the decks are cleared. Capital spending and production will add more to GDP," said Beal.
The Producer Price Index for June was unchanged versus estimates of a .4% increase and a .6% decline in May. The PPI Ex Food & Energy for June fell .1% versus estimates of a .1% increase and a .1% gain in May. US producer prices were unchanged in June, pulled lower by discounts at GM, as well as cheaper food and computers. Excluding food & energy, core raw materials prices fell 4.3% from last year, the most since May 2004. Food prices fell 1.1%, the largest drop since July 2004. Computer prices fell .8% after declining 4.8% last month. "Inflationary pressures are coming down at all stages," said David Sloan, senior market economist at 4Cast.com. "It's not so much a question of passing on costs, you see with these figures in the pipeline, there aren't higher costs to pass on," said Sloan.
Industrial Production for June rose .9% versus estimates of a .4% gain and a .3% increase in May. Capacity Utilization for June rose to 80.0% versus estimates of 79.6% and 79.4% in May. US industrial production rose twice as much as expected last month, the most since Feb. 2004. Capacity Utilization rose to the best level since December 2000. Automakers resumed production after scaling back earlier this year to trim their inventories. "The manufacturing sector is poised to do a little better this summer than it has in the spring," said Stephen Stanley, chief economist at RBS Greenwich Capital.
Preliminary Univ. of Mich. Consumer Confidence for July rose to 96.5 versus estimates of 95.0 and a reading of 96.0 in June. US consumer sentiment unexpectedly rose in July to the highest level this year led by stable employment prospects and rising home values. Consumers have become accustomed to rising gasoline prices, which reached a record last week. The expectations index, based on optimism about the next one to five years, increased to 86.6, the highest since December. "It's a watch what I do, not what I say kind of scenario because people are spending even as they're complaining," said Glenn Haberbush, an economist at Mizuho Securities.
BOTTOM LINE: Overall, last week's economic data were very positive. The Trade Deficit will likely narrow modestly through year-end as decelerating import prices, led lower by commodities, more than offset slower global economic activity. The US budget deficit will likely come in around $250 billion, significantly lower than expectations. President Bush's goal of cutting the deficit in half by 2009 will likely be achieved next year as a healthy US economy continues to generate soaring tax revenue for the Treasury. As I predicted at the beginning of the year, inflation will likely rise this year less than the long-term average of 3.0%. The recent cyclical bout of modest inflation has likely ended and the secular trend of disinflation is in the early stages of reasserting itself. An improving job market, a rising stock market and booming housing market are helping to boost consumer sentiment and spending. Falling energy prices, low interest rates and lower inflation should also help propel Retail Sales through year-end. It is hard to gauge weekly trends in employment at this time due to seasonal factors. The worst of the pain in the manufacturing sector now appears over. I expect manufacturing to improve modestly through year-end, adding to GDP growth. However, slowing global growth will hold manufacturing gains in check. The fact that consumer sentiment rose even with the London bombings, record gas prices and hurricanes in Florida bodes well for future readings. Finally, the ECRI Weekly Leading Index fell .67% to 133.50 and is forecasting healthy but moderating growth.
