Deller note: sorry this is late, took some vacation time....
Economic Week in Review:
Signs point to a very gradual recovery
July 16, 2010
The Federal Open Market Committee (FOMC) released the minutes from its June meeting this week, which stated that many committee members have downgraded their expectations on economic growth and believe that inflation remains a distant threat. Other economic reports released this week are strong indicators that the FOMC's thoughts are right on target. For the week ending July 16, the S&P 500 Index fell 1.2% to 1,064.88 (for a year-to-date total return-including price change plus dividends-of about -3.5%). The yield of the 10-year U.S. Treasury note fell 11 basis points to 2.96% (for a year-to-date decrease of 89 basis points).
Fed downgrades economic expectations
The minutes from the FOMC's June meeting indicated that the committee members expect the recovery to continue but at a slower pace than previously anticipated.
According to the minutes: "Most participants revised down slightly their outlook for economic growth, and about one-half of the participants judged the balance of risks to growth as having moved to the downside. Most participants continue to see the risks to inflation as balanced. A number of participants expressed the view that, over the next several years, both employment and inflation would likely be below levels they consider to be consistent with their dual mandate, but they anticipated that, with appropriate monetary policy, both would rise over time to levels consistent with the Federal Reserve's objectives."
Prices fall for gas and food
The consumer price index, a key indicator of inflation, fell 0.1% in June. Declining energy costs, specifically gas prices, led to the overall decline.
Core CPI, which doesn't take into account volatile food and energy prices, rose 0.2% for the month-the largest gain since October of last year. The increase was due mainly to rising costs for apparel, medical care, and cigarettes.
The producer price index (PPI)-which tracks prices that producers receive for finished goods-was down for the third month in a row, falling 0.5% in June. The decline was mainly due to the 2.2% drop in prices of consumer food products.
Consumer spending slips again
Retail sales dropped for the second consecutive month, falling 0.5% in June. The significant dip in sales is a sign that consumers are still acting conservatively when it comes to discretionary spending. The downshift is disappointing, since economists are counting on consumer spending-which accounts for two-thirds of U.S. economic activity-to help pull the economy out of recession.
The most significant declines came from car dealers and gasoline stations, where sales were down 2.3% and 2.0%, respectively, for the month. Sales were also down at sporting goods, furniture, and building supply stores. Meanwhile, electronics, appliance, and department stores all reported a jump in sales, as did nonstore retailers.
Inventories rise
Overall business inventories rose for the fifth month in a row, jumping 0.1% in May. Retailers and wholesalers reported increases in surplus, while manufacturers decreased their stockpiles for the month.
U.S. trade gap widens
The U.S. trade deficit-the difference between the country's exports and imports-rose to $42.3 billion in May, reaching its highest level in a year-and-a-half. While U.S. exports were up 2.4%, imports grew faster, expanding 2.9% for the month.
Imports from China continued to rise in May as demand for computers and apparel increased from both consumers and companies alike. Meanwhile, U.S. exports included cars, machinery, and household goods.
Factory production slows
Industrial production rose in June but at a slower rate than in previous months, increasing only 0.1%. Production in the utilities and mining sectors grew, while manufacturing output dropped, indicating that production in our nation's factories, which had spiked significantly in recent months, is beginning to cool off.
The economic week ahead
Next week's economic news will include the latest on the nation's housing situation, including reports on new residential construction (Tuesday) and existing-homes sales (Thursday). The Conference Board will release its most recent report on leading economic indicators on Thursday.
--
Steven C. Deller
Professor and Community Development Economist Department of Agricultural and Applied Economics
515 Taylor Hall --- 427 Lorch Street
University of Wisconsin-Madison/Extension Madison, WI 53706
608-263-6251
"Conformity can be costly in a world of uncertainty"
Nobel winning economist Douglass North
