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US economy on the recovery path

A flurry of economic reports was released last week, with most readings signaling a resurgence in economic activity.

Serving as solid evidence to a still strong consumer spending, retail sales for May surged up 1.4%, with the gain mainly due to higher sales of gasoline, clothing and motor vehicle & parts. The strong performance has been made possible by the tight labor market conditions. Going forward, real consumer spending is expected to continue bolster GDP growth notwithstanding the weakness in the housing market.

The business inventories report also supported recent conviction that the economy is returning to trend-like-growth after four quarters of sub-par growth. Inventories rose 0.4% in April after remaining unchanged in March, suggesting that the inventory cycle has begun to turn and inventory build up will add to economic growth going forward. Manufacturing conditions are improving as well. The New York Fed's survey of manufacturing conditions in the region revealed upbeat sentiment, as the current business conditions index climbing sharply.

As traders warmed to the idea of a rebound in growth, they were also cheered by inflationary readings that proved to be benign. The producer price inflation report revealed that the headline index rose at a stronger than expected 0.9% pace. Nonetheless, the producer price index remains well below its cycle peak in 2005, while the core producer prices edged up 0.2%. The retail price inflation data, also released in the week, showed a 0.7% increase in consumer prices and a more modest 0.1% rise in core consumer prices, which pushed down the annual rate of the core consumer price inflation to 2.2% in May from 2.3% in April.

The housing market recession that has resulted in oversupply of houses led to lower housing costs. The industrial production report revealed a flat performance for May, as higher mining and manufacturing production offset a sharp decline in utility output. The bright spot was a decline in capacity utilization, which should remove concerns over inflation. Specifically, in the manufacturing sector, auto and machinery production remained weak, while production by computer and electronics segment improved. However, inflationary pressures are still prevalent, as reflected by the 0.9% monthly growth in May import prices compared to expectations for a 0.3% increase.

Crude and petroleum import prices advanced at a monthly pace of 2.7%, but declined 4.6% annually. Export prices jumped 4.3% from the previous year, with agricultural export prices jumping 18.2% from a year-ago. The Treasury International Capital report revealed that net capital inflows increased in April, as US purchase of foreign bonds declined. Meanwhile, the current account deficit for the first quarter widened by about $5 billion. Surpluses in the services account and the investment income account mitigated to some extent the increase in the first quarter current account deficit.

With the economy spawning some good tidings, traders may look forward to the upcoming week for confirmation of their conjectures that the economy is still expanding without a concomitant increase in inflationary pressures. Although the week's economic calendar is relatively light, some key housing market reports are due out in the week. The May housing starts report of the Commerce Department is expected to reveal softness, in-line with the slump in the building permits for April. Building permits serve as a leading indicator for housing starts, as they are based on actual filings.

Economists are now reconciled to the fact that the housing market will continue to remain weak for an extended period and it will be long before the construction activity rebounds. An interesting observation is that there has not been a proportional reduction in jobs in the sector despite the prolonged downturn. Further, the markets may also focus on the survey results of the Philadelphia Fed's manufacturing survey and the Conference Board's leading index for May. Speeches by Federal Reserve officials are also expected to be in the radar ahead of the Federal Reserve Open Market Committee meeting scheduled for 27th and 28th of June. (