U.S. economic analysis – week of July 11, 2005

U.S. economic analysis – week of July 11, 2005

Lower oil prices are leading a swell of economic good news as stocks are rebounding after a lackluster and widely pessimistic previous week Oil prices have reportedly dropped $2 since weather reports indicate that Hurricane Emily will completely miss Gulf of Mexico oil platforms. The National Hurricane Center has all but assured that a stubborn ridge of high pressure hanging over the Atlantic will suppress any tendency for Emily to turn northward. There was happy news closer to home as well as data released this morning by the U.S. Department of Congress reported that retail sales jumped 1.7 percent in June. The increase follows a revised May decline of 0.3 percent and has gone some way in allaying fears that high fuel prices are curbing consumer spending. The increase exceeded predictions that retail sales would rise only 0.9 percent and was led by strong auto sales spurred by so-called employee discount incentives the big three U.S. automakers are offering. Auto sales responded, in turn, by jumping 4.8 percent in June. In related news, the Consumer Price Index was flat in June after a 0.1 percent drop in May. The CPI news is a welcome indication that inflation is, at least for now, in check. The CPI news was mixed, however, as fuel prices declined in June, a trend that is sure to change as the average price for a gallon of unleaded gas in the U.S. coasted above a record high of $2.33. Markets are reacting strongly to the news, adding yet another day of gains to bring their winning streak to five. Still, analysts are cautious about pinning too much hope that this is the start of a major second half rally. Several factors remain on the horizon which could put a dent in investor optimism. For one, despite its recent decline, there’s no real reason to think oil is done climbing and though the markets seem to have reached some amount of comfort with current oil prices, any further significant volatility could tip the balance in the Bears’ favor. Also, all indications are that the Federal Reserve will continue to raise interest rates, at least for the foreseeable future. Much of the conventional wisdom coming out of Wall Street is that the Fed is going to raise rates one more quarter percent and then quit for a while. But, the fact is that the economy seems to be hitting its stride. Consumer spending is up, inflation is level, and unemployment remains in check. Should these trends continue, there’s no telling how much higher the Fed could go or how the markets will respond. Finally, next week will be pivotal as it is when the majority of earnings reports are released. Although early reports released by Alcoa, among others, have been mildly encouraging, the second quarter of 2005 is projected to be the slowest in three years. Most corporations are facing soaring fuel prices and a stronger dollar. Both factors are widely expected to eat into profit margins which, in turn, will dampen earnings. Taking all these factors into account paints a very intriguing economic picture where the questions far outpace the answers. Exactly which factors, if any or all will ultimately shape the U.S. economy in the coming second half is anyone’s guess.