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The Week Ahead

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This, in turn, will limit the growth of non−residential investment

Mon, Jul 21 2008, 09:07 GMT
by Marcial Nava, Alejandro Neut

BBVA Bancomer

Conference Board’s Index of Leading Indicators (June, Monday 8:30 ET) F: -0.5% C: -0.1% P: 0.1%

Some indicators used to calculate the leading index worsened significantly in June, reflecting a deterioration of economic activity at the end of the second quarter. For instance, the Consumer Confidence Index fell to the lowest level since February 1992, while the S&P 500 declined 4.4% amid bad news on the financial and energy fronts. On the manufacturing side, average hours worked decreased for the third consecutive month, reflecting weaker conditions in the industry. Moreover, the labor market deteriorated further as jobless insurance claims increased substantially in June. These negative trends will be partially offset by gains in vendor performance, building permits and, presumably in manufacturing goods orders. As a result, the LEI will decline 0.5% from 0.1% in May.

Durable Goods Orders (June, Friday 8:30 ET) F: 0.3% C: 0.1% P: 0.0%

Durable goods orders will bounce back after three consecutive months of negative readings. The increase is likely to be driven by volatility in transportation and defense. However, on a year-over-year basis, orders will continue on a downward trend, with autos and housing-related goods experiencing the sharpest slowdown. This is consistent with a slower pace of consumers’ spending. On the other side, orders of capital goods excluding defense and aircraft probably decreased on a monthly basis. Going forward, we expect them to be hit by a sluggish demand and credit constrains. This, in turn, will limit the growth of non-residential investment.

Existing & New Home Sales (June, Thursday & Friday, 10.00 & 8:30 ET) F: 4.85M, 500K C: 4.95M, 505K P: 4.99M, 512K

We expect both new and existing home sales to decrease further in June. Rising energy costs, job losses, falling home prices and increasing tensions in the mortgage market have prompted many potential buyers to stop looking for a house and wait until conditions improve. Unfortunately, leading indicators suggest that the outlook for the housing sector is still gloomy. For instance, the NAHB Housing Market Index plunged to 16 in July, its lowest level on record. In our main scenario, the housing market will not recover until the second half of 2009.

Beige Book (June to mid-July, Wednesday, 14.00 ET)

The Beige Book will probably show all US regions fraught with dual inflationary/recessionary tensions. Oil prices remain the nationwide threat to price stability, while the nation’s strained financial system (illustrated these past weeks by Fannie Mae and Freddie Mac) remains the principal obstacle to future growth. In addition, traditional cyclical dynamics, such as the worsening of consumer confidence, will be recognized across the board. But regions will present a different balance of risks, in line with the different views expressed by Board members in the last FOMC meeting. In that regard, risks to growth will not be as dominant in Texas (where the Fed is headed by Fed President Fisher) as they are in, for example, Michigan.

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Published on  Mon, Jul 21 2008, 09:10 GMT