The Weekend Economic Wrap Up

By May 20, 2007Economy

Business is UpThis past week provided some mixed signals on the state of the economy.

First. The Labor Department reported that consumer prices (CPI) increased by 0.4 percent in April. While this is a little slower than the 0.6 percent rise in March, the continued increase in energy prices is increasing the pace of inflation. Enegy prices rose by 2.4 percent last month.

The good news, however, is that core consumer prices, which exclude food and energy, edged up just 0.2 percent last month, similar to the pace of the prior 2 years. This is a hopefull sign that the recent rise in energy prices has not yet spilled over into the general economy.

Second. With April consumer prices in, the Labor Department also reported on real earnings for April. With energy prices pushing up the overall inflation last month, inflation-adjusted average hourly earnings remained unchanged last month. This is an indication that consumer spending will be moderating in the months ahead. Since consumers are less able to depend on home equity line of credit for spending, they are more dependent on their earnings. And, with earnings stagnating, consumer spending should slowdown in the second quarter.

Third. On Wednesday, the Federal Reserve reported that industrial production accelerated in April. After falling by 0.3 percent in March, industrial production rose by 0.7 percent in April. Closer to home, the manufacturing sector rose by a solid 0.5 percent last month. This is very close to the 0.6 percent rise in March. Most of the gain was in the durable goods sectors, such as computers, motor vehicles, medical equipment, electronic components, and primary metals. This is a hopeful sign that the manufacturing sector is begining to pull out of its recent six-month slump.

Four. The Census Bureau reported that on building permits and housing starts. Building permits plummeted 8.9 percent in April, signaling that the housing downturn will continue into the second quarter. Over the past year, permits are down 28 percent.

Housing starts fell by 2.5 percent last month. Again, thi sshows that the housing slump is continuing.

Together, all these reports show that the economy in second quarter will continue to underperform. The downturn in housing is ongoing, higher energy prices are eating into workers earnings, pointing toward slower consumer spending compared to the first quarter. This bad news is balanced, to a degree, by a recovery in durable manufacturing output, indicating that a rebound in exports as well as business investment may be in the works.