Economic Health Report

Economic reports remained weak last week. Housing starts are still falling and retail sales growth has ebbed. Manufacturing activity had been holding up relatively well, but the Fed's industrial production report and a regional purchasing managers' survey pointed to some chinks in the armor there. Inflation trends worsened.

Last Week
Housing. A change to building codes in New York accelerated apartment construction and boosted overall housing starts in June, but single-family home starts fell another 5% from May to June. Since peaking in January 2006, single-family home starts have fallen 65%.

The National Association of Homebuilders monthly survey showed further erosion in builder optimism in July. The overall index for this survey, which has been in place for over 20 years, fell to a record low.

Consumer. Retail and food service sales rose 0.1% from May to June, on a seasonally adjusted basis. Over the past year, sales have risen just 3%, suggesting a possible decline in real (inflation-adjusted) terms. Sales at gasoline stations and grocery stores have been boosted by especially rapid price increases. Here's a look at the growth rate in retail sales excluding those two categories; the latest growth rates are in line with those in the 2001 recession:

Manufacturing. The Federal Reserve's overall industrial production index rose 0.5% in June, after declining in three of the four previous months. The resolution of a strike in the auto industry helped lift production in June. Output of other consumer durable goods continued to decline in June; for example, the index for "furniture and related products" fell in each of the six months thus far in 2008, and has declined 8% since June 2007.

The Federal Reserve Bank of New York conducts a survey of purchasing managers in manufacturing firms. The latest results (for July) indicated continued net contraction in activity around the state. There has been a significant increase in the share of firms scaling back their production plans since last year.

Overall/Inflation. The Consumer Price Index (CPI) rose 1.1% from May to June, a significantly faster pace than analysts forecasting the index had expected. The year-over-year increase in the CPI climbed to 5%, reaching the highest rate since 1991.

Former Federal Reserve Chairman Paul Volcker testified for the Joint Economic Committee of Congress early in the week. While discussing the quality of the CPI as an inflation metric, Volcker stated, "I think there's a lot more inflation than in those figures."

The Producer Price Indexes for finished, intermediate, and primary goods posted year-over-year increases of 9.2%, 14.5%, and 45.5% in June, respectively. Private sector inflation measures have been giving off louder warnings; for example, surveys of purchasing managers indicate the prices they pay for goods and services have been rising at 1970s-type rates.

The "prices paid" component of the Federal Reserve Bank of New York's "Empire State Index" spiked sharply higher in July.

Earnings releases and business surveys suggest a growing number of firms are facing margin pressure as cost increases outstrip their own ability to raise prices.

This Week
Housing. The Mortgage Bankers Association report on purchase applications comes out Tuesday. The National Association of Realtors report on existing home sales comes out Thursday.

Consumer. The University of Michigan reports its survey of consumer sentiment on Friday.

Labor Markets. The unemployment insurance claims report comes out Thursday.

Overall/Inflation. The index of leading economic indicators comes out Monday. The Federal Reserve's "beige book" review of business activity comes out Wednesday.