US economic overview - July 31, 2006

General: We reported in the last overview that the US economy has started to slow down – just as it was supposed to, based on actions taken by the Federal Reserve. This slowdown was emphatically confirmed when the Commerce Department published their first reading of GDP growth for the second quarter. It came in at a 2.5% annual rate - way below expectations of 3 – 4%. At the same time, inflation is a bit higher than the Federal Reserve would prefer. Yet another quarter point interest hike on August 8 is not entirely out of the question. The following details highlight some of the problem areas. But as you will see, there are some uplifting signs as well. Unemployment: 4.6% in June Industrial Production: + 0.8% in June. Annualized rate in Q2 was + 6.6%, the fastest pace since 1999; capacity utilization in June increased to 82.4% (2.1 percentage points over the rate for June 2005) Durable Goods: + 3.1% in June (much higher than expected) but – 0.5% for Q2 compared to + 19.8% in Q1 Capital Goods (excluding aircraft and defense): + 0.4% in June (less than expected) Trade Deficit: increased by a slight 0.8% to $ 3.8 billion in May. The annual rate is now running at $763 million, 6.5% ahead of last year Housing market: Total home sales fell 1.3%. The median price for an existing home was $231,000 in June, 0.9% less than a year earlier. Homes available on the market rose to a 6.1 months' supply - the highest since 1997. Personal Consumption Expenditure (PCE): + 4.1% for Q2 after rising 2% in Q1. The PCE excluding food and energy, the Federal Reserve's favorite inflation measure, was up 2.9% in Q2 compared to 2.1% in Q1 Special Focus - The Consumer: Consumer spending accounts for more than two-thirds of GDP, and it rose 2.5% in Q2 after soaring to 4.8% in Q1. Retail sales in June slipped 0.1% to $363.80 billion. Sales for cars and car parts fell 1.4% in June. Squeezed by ever rising gasoline prices (average $3.00 per gallon or Euro .63 per liter, high for US standards), higher interest rates and a reduced borrowing base because of lower real estate prices, the US consumer clearly spends less. Any good news? The Conference Board (a non profit research group that computes the indexes from the Commerce Department) has consumer confidence up in July.