WASHINGTON (AFX) - U.S. economic indicators to be released this week are expected to show the smallest increase in quarterly GDP since the second quarter of 1995 and other weak fundamentals that will reinforce expectations of further Federal Reserve interest rate cuts, economists said.
"We expect generally downbeat economic reports coming out next week will keep the market anticipating more Fed easing at the May 15 FOMC meeting," wrote Dana Johnson, head of research at Banc One Capital Markets.
Economists still expect the economy to pick up in the second half of the year and pointed to the decline in inventories in first quarter GDP as a positive sign, showing the inventory correction may be concluding.
"The more that firms have tried to reduce their inventories this quarter, and the worse that is for growth in this quarter, the better that might be for growth prospects going forward," said Nick Bennenbroek of Deutsche Banc/Alex Brown.
Bennenbroek said the first-quarter numbers would be higher-than previously expected because of February's trade deficit figures released showed a record drop in imports, causing economists to revise their GDP forecasts upward.
"One of the reasons we've made a revision to our forecast was the trade number which...for February (showed)...a very sharp drop in imports so things don't look quite as bad for this first quarter as we thought," Bennenbroek said.
But economist Ian Morris of HSBC said the trade figures showed a false sense of strength in the economy.
"The last few times we saw imports decline by this amount was actually in 1990 Q4 and 1991 Q1, which were the final two quarters of recession in that time," Morris said.
"Falling and plunging imports is actually a bad sign for growth because it implies falling demand, and because of this technicality we've got a positive GDP, in all likelihood it's still suggestive of a very very weak economy."
Analysts also pointed to the Employment Cost Index (ECI) as a key indicator to watch for rising pressure on corporate profit margins. The consensus forecast is for a 1.2 pct increase in the Q1 ECI.
"The Fed is likely most interested in employment costs...due to profit margin implications," First Union economists said in a note to clients.
The FOMC, in its statement announcing a surprise 50 basis point cut in the key federal funds rate, said for the first time during this easing cycle that it is concerned with the outlook for capital spending.
Business capital spending accounted for 29 pct of real GDP growth from 1992 through last year, according to Banc One's Johnson.
"The wording of the (FOMC) statement shows that Greenspan understands the real risks to the economic outlook are related to capital spending," Bear Stearns economists wrote in a research note. This shift in concerns "represents a major shift in Greenspan's thinking from that contained in" the Fed's report on the economy in February, Bear Stearns added.
Fist Union economists agreed that the FOMC statement "appeared to shift the Fed anti-recession focus from consumers and inventories to profit problems and capital spending."
Rising employment costs are likely to put additional pressure on corporate profit margins, further limiting businesses' ability to invest in new capital, economists said.
Consumer confidence is expected to drop by more than five pct to 111, in line with the University of Michigan's consumer sentiment survey released earlier this month which showed a continued decline. "The Michigan numbers fell sharply in the early portion of April, it's probably going to be mirrored in the Conference Board's numbers," said Brian Jones of Salomon Smith Barney.
Following are consensus forecasts of Wall Street economists for data to be released this week.
APRIL CONSUMER CONFIDENCE, Tuesday, (10.00 am): Economists expect the consumer confidence to fall 6 points to 111. It rose 7.8 to 117 in March.
MARCH DURABLE GOODS, Wednesday, (8.30 am): Economists expect the durable goods order to rise 0.7 pct, after falling 0.4 pct in February.
MARCH EXISTING HOME SALES, Wednesday, (10.00 am): Economists expect existing home sales to fall 1.5 pct to 5.10 mln units at a seasonally adjusted annual rate, after falling 0.4 pct to 5.18 mln units in February. Bank of America economists "anticipate a slightly higher number in this latest report, as lower mortgage rates have attracted homebuyers, especially for lower and moderately priced housing."
MARCH NEW HOME SALES, Wednesday, (10.00 am): Economists expect new home sales to rise 0.2 pct to 913,000 units at a seasonally adjusted annual rate, after fell 2.4 pct to 911,000 units.
APRIL 21 INITIAL CLAIMS, Thursday, (8.30 am): Economists expect initial claims for regular state unemployment benefits to rise 8,000 to a seasonally adjusted 393,000 for the week ended April 21 from the previous week, when they fell 10,000 to 385,000.
"Jobless claims will likely remain close to their recent four-week average, as companies continue to pare back staff in the face of lower projections for near-term sales and profit performance," wrote economists at Bank of America.
Q1 EMPLOYMENT COST INDEX, Thursday, (8.30 am): Economist predict the ECI to rise 1.2 pct for the first quarter of 2001. It rose 0.8 pct in the previous quarter.
Q1 GDP, Thursday, (8.30 am): Economists expect the first quarter GDP to rise 0.8 pct. It rose 1.0 pct in the previous quarter.