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The Week Ahead

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We expect headline producer prices to increase 0.8% in July

Mon, Aug 18 2008, 08:38 GMT
by Marcial Nava, Alejandro Neut

BBVA Bancomer

Housing Starts & Building Permits (Jul, Tuesday 8:30 am)

F: 945, 966K C: 960, 970K P: 1066, 1091K

After reaching record highs in 2005, housing starts have adjusted downwards 1.3 million on average per year. However, this trend has not been enough to reduce excess housing supply. We anticipate July’s housing starts to edge down to 945K from 1,066K in the previous month. Likewise, building permits likely declined to 966K from 1,092 in June. Thus residential investment will subtract to GDP growth in both 2008 and 2009.

Producer Price Index (Jul, Tuesday 8:30 am)

F: 0.8%, 0.2% C: 0.6%, 0.2%K P: 1.8%, 0.2%K

We expect headline producer prices to increase 0.8% in July, as a result of elevated fuel and commodity prices. Although firms continue to face ongoing significant pressures in the first stages of production, the passthrough to finished goods other than energy and food has been limited. Thus, we expect core inflation at 0.2% in July, a similar rate as in the previous month. Going forward, the declines in some commodity prices at the end of July and the beginning of August will result in a sharp drop in headline inflation figures for this month, supporting our forecast of stable Fed funds at 2% for the rest of the year.

Philadelphia Index (Aug, Thursday, 10:00 ET)

F: -13.0, -30.0 C: -5.0, -18.0 P: -11.7, -24.0

The Philly Fed Index has declined for eight consecutive months and will very likely drop once again in August. As a result of weaker consumption, bussiness inventories are increasing and firms are scaling back production, to levels not seen since the last recession. This trend suggests that business confidence is likely to edge down and industrial production could decline in coming months. On the one hand, the housing downturn is limiting a recovery in new orders of building equipment and materials, and on the other hand, elevated commodity and energy prices are shrinking profit margins.

Conference Board’s Index of Leading Indicators (Jul, Thu. 10:00 ET)

 F: -0.1% C: -0.2% P: -0.1%

During July, the economic indicators comprised in the leading index showed mixed results. For example, ISM new orders, initial jobless claims and the stock market worsened while consumer confidence, building permits and supplier deliveries stop falling. As a result, we expect July’s LEI to decline 0.1% for the second consecutive month. This is consistent with our expectation of economic weakness as we head into the second half of the third quarter. Households are likely to hold back spending as a result of slower real disposable income growth and tighter credit conditions –as financial institutions continue deleveraging. Moreover, net exports are likely to moderate as sluggish demand abroad reduces exports growth. Meanwhile, nonresidential investment will continue to decelerate although it will remain stronger than overall GDP. Finally, the housing downturn will continue for several more quarters.

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Published on  Mon, Aug 25 2008, 07:41 GMT