By Matthew Freedman As tempting as it is to gawk at the earnings wreck on Wall Street, investors have begun to turn their attention to economic reports in hopes of spotting signs of a recovery.
Unfortunately, the latest GDP release offers few clear signals as to whether stronger growth is just around the corner or still miles off. The economy expanded at its slowest pace in over eight years during the second quarter, but significant progress in trimming inventory overhangs could pave the way for an acceleration in production in coming months. That is, of course, unless consumers slam on the brakes in response to weakening labor market and income conditions and businesses, in turn, continue to put the skids on investment spending.
As traffic thins on the earnings highway during the week ahead, traders will look to several key economic releases for guidance, beginning with Tuesday's personal income report for June. Income growth likely remained slow but steady during the month, matching May's pace but falling well short of the rate that prevailed during the first three months of the year. Cost cutting by careworn companies has crimped growth in employee compensation, blunting one source of inflationary pressure in the economy.
Meanwhile, in the wake of rising job insecurity and moderating income gains, consumption growth likely remained subdued in June, although the prospect of receiving a few extra dollars in the mail from Uncle Sam could spur something of a late-summer splurge. Auto makers' sales reports for July, which will start rolling in late next week, will provide an early indication as to whether rebates - both in the form of checks from the government and generous incentives from manufacturers - are helping to purge crowded dealer car lots.
Anticipation of that tax rebate check may also help to keep consumer confidence afloat amid the deluge of negative news from Corporate America. Tuesday's confidence report is expected to point to unwavering consumer sentiment in July as optimism that the economy will perk up later this year or in early 2002 helps to offset lingering gloom about present conditions.
Tuesday's Chicago Purchasing Manager's Index will provide a taste of what's likely to come in Wednesday's NAPM report. Both are expected to show a slight deterioration in manufacturing conditions in July, which will mark the tenth consecutive month of contraction for the industry in the Fed's seventh district and the twelfth for that of the broader economy. With demand still feeble and inventories bloated, fatter profit margins may still be out of reach for manufacturers, whose payrolls are 750,000 employees slimmer than they were just one year ago.
Friday's key employment report will reveal whether the manufacturing industry continued on its crash diet in July. The consensus forecast calls for yet another substantial drop in total employment, with manufacturing accounting for the bulk of the losses and services picking up some of the slack. The unemployment rate, meanwhile, is expected to have edged up another tenth of a percentage point to 4.6%, the highest rate in over three years.
There will be plenty to drive action in overseas markets, with Argentina's Senate likely to take a second stab Tuesday at passing budget cuts aimed at averting a debt default. On the other side of the Atlantic, Eurostat will report euro-zone unemployment and confidence figures, and both the Bank of England and the European Central Bank are scheduled to meet to discuss monetary policy.
Back in the states, futures traders are confident that the Fed, still fearful that the U.S. economy could run out of gas without a little more monetary pump-priming, will slash rates at its next meeting on August 21, and perhaps again in October. Whether Greenspan puts the pedal to the metal, though, may make little difference if businesses continue to apply the brakes when it comes to investment spending. Hope lies in the consumer, whose continued spending could help steer the economy clear of recession and thereby spare Wall Street from yet another earnings catastrophe.