Key U.S. Data Releases and Events

With respect to activity indicators for July, we expect a strong advance in both retail sales and industrial production, driven primarily by higher sales and production of light vehicles. The added funding provided by Congress at the end of last week for the cash for clunkers program should provide strong support for the auto sector for a couple more months, effectively sealing very respectable real GDP growth in the third quarter.

In other indicators, the trade balance will widen in June on account of a spike in crude oil import prices. But July consumer prices will be tame and consumer confidence should get a lift in mid-August from exceptional auto discount deals that have been put on the table, as well as a lift in equity valuations.

Finally, the FOMC is meeting on Tuesday and Wednesday, and we expect no change in the target range for the federal funds rate. However, the Fed will continue to unwind some of its redundant short-term bank credit programs. Although the Fed's programs to purchase Treasury bonds and mortgage debt are not expected to be changed, its total balance sheet is expected to continue to shrink on net over the next several months. The Fed's exit strategy is already in motion.

KEY U.S. DATA RELEASES THIS WEEK

Tuesday, August 11 – Productivity (Preliminary Q2)

Nonfarm Business Productivity

• IHS Global Insight: +5.4%
• Consensus: +5.5%
• Last Actual: +1.6% (Final Q1)

Unit Labor Costs

• IHS Global Insight: -5.7%
• Consensus: -2.4%
• Last Actual: +3.0% (Final Q1)

What to Look For

• Productivity is expected to jump by 5.4%, while unit labor costs will move down sharply.

Implications

We project that labor productivity jumped 5.4% (annual rate) in the second quarter, on a 1.7% drop in output and a 6.7% drop in hours. Unit labor costs tumbled 5.7% because of the jump in productivity. Productivity's strong second-quarter performance reflects vigorous cost cutting that has supported profits. Gains in the third quarter may not be as strong, but still be respectable, and should provide further support to corporate earnings momentum.

Wednesday, August 12 – Trade Balance (Jun.)

• IHS Global Insight: -$29.5 Billion
• Consensus: -$28.5 Billion
• Last Actual: -$26.0 Billion (May)

What to Look For

• The trade deficit is expected to widen to $29.5 billion in June, from $26.0 billion in May, almost entirely because of higher import prices for oil.

Implications

Trade has been a big support for growth in the first half of 2009, dampening the downturn as imports have fallen faster than exports. As the inventory cycle turns in the second half, pulling in more imports, trade is likely to become a drag on growth.

Wednesday, August 12 – FOMC Rate Decision

• IHS Global Insight: 0.00–0.25%
• Consensus: 0.00–0.25%
• Last Actual: 0.00–0.25%

What to Look For

• The FOMC is expected to vote to keep the target range for the federal funds rate unchanged at 0.0–0.25%.

Implications

While economic and financial conditions have improved, much of this is connected with the massive ARRA fiscal stimulus bill, which was recently augmented by the "cash for clunkers" program, and the Fed's exceptionally low short-term interest rates. Core inflation is running near 1.5%, below the Fed's target. In addition, the Fed's balance sheet, which peaked at about $2.2 trillion on May 21, is gradually unwinding as redundant short-term bank credit facilities are being scaled back and other facilities are being run off the books. The Fed's exit strategy is already in motion.

Thursday, August 13 – Retail Sales (Jul.)

Total

• IHS Global Insight: +1.3%
• Consensus: +0.6%
• Last Actual: +0.6% (Jun.)

Less Autos

• IHS Global Insight: +0.3%
• Consensus: +0.1%
• Last Actual: +0.3% (Jun.)

What to Look For

• Retail sales climbed an estimated 1.3% in July, led by a surge in auto sales in response to the "cash for clunkers" program.

Implications

Unit sales of light vehicles surged from an annual rate of 9.7 million in June to 11.2 million in July, reaching their highest level since last September. Excluding auto dealers, retail sales advanced an estimated 0.3%, as modest gains at most channels were offset by a price-driven drop at gasoline stations. The "cash for clunkers" program recently received $2 billion in additional funding from Congress, and that will definitely light a fire under third quarter auto sales.

Friday, August 14 – Consumer Price Index (Jul.)

Total

• IHS Global Insight: +0.1%
• Consensus: 0.0%
• Last Actual: +0.7% (Jun.)

Core

• IHS Global Insight: +0.2%
• Consensus: +0.1%
• Last Actual: +0.2% (Jun.)

What to Look For

• The consumer price index should remain quiet in July, expected to rise only 0.1%.
• The core rate is likely to advance 0.2%, suggesting little threat of deflation.

Implications

Pricing pressures continue to be contained, as only tentative signs of a turnaround emerge. Energy prices should not repeat their volatility of recent months, with gasoline likely posting only a small seasonally adjusted decline of just over 1%. Excluding food and energy, core consumer prices should remain resilient, recording another 0.2% gain, further dimming the threat of deflation.

Friday, August 14 – Industrial Production (Jul.)

• IHS Global Insight: +0.8%
• Consensus: +0.3%
• Last Actual: -0.4% (Jun.)

What to Look For

• Industrial production should rebound 0.8%, with motor vehicle production leading the charge, pushing manufacturing up 1.2%.

Implications

Vehicle production skidded in the preceding month of June, with Chrysler and GM in bankruptcy, but rebounded as automakers returned to work in July. The production reading from the ISM manufacturing report surged to 57.9 for a second month of expansion. Hours worked in manufacturing expanded 0.4%, although this was dominated by vehicles. The gain in overall production would have been larger, but mild July weather kept air conditioners working for less much of the month than normal, while electricity output fell.

Friday, August 14 – Michigan Consumer Sentiment Index (Preliminary Aug.)

• IHS Global Insight: 70.0
• Consensus: 69.0
• Last Actual: 66.0 (Final Jul.)

What to Look For

• The Reuters/University of Michigan's consumer sentiment index is expected to improve from 66.0 in July to 70.0 in early August.

Implications

Buying attitudes for vehicles got a major lift from the "cash for clunkers" program, as the opportunity for rebates from Uncle Sam of $3,500–4,500, in addition to major manufacturer incentives, sent prospective buyers flocking to dealer showrooms. Meanwhile, a rising stock market is boosting consumer finances, offsetting some of the damage from earlier losses and the slide in wage and salary income.