This week offers a big round of major economic reports for April that will set the tone for market assessments of the economy's performance at the start of the second quarter. So far, investors' worst fears about recession have not been realized. Through the first quarter, the economy has put together two consecutive quarters of weak, but positive, economic growth, and inflation outside of energy and food has remained tame. This week's data will help to determine if those trends are continuing.
The second quarter is shaping up to be a pivotal period for the outlookâespecially for consumer spending. The headwinds buffeting outlays by both businesses and consumers appear to be getting stronger, just as the tax rebates are starting to show up. The impact of the rebates remains a big question mark. Businesses may not gear up their hiring and spending knowing the effect is only temporary, and consumers may choose to save a high proportion of the money or use it to pay down existing debts amid their already tough financial situations.
The supports under household spending are getting weaker. The Fed says banks have further tightened their lending standards for mortgages, credit cards, and other consumer loans beyond the sharp tightening of conditions earlier this year. Record gasoline prices and fewer jobs are intensifying the squeeze on buying power, and the shrinkage in household net worth that began last year is accelerating. April retail sales, due on Tuesday, will offer a glimpse of how consumers are holding up. Lousy April auto sales, which dropped to a ten-year low of 14.4 million, may be suggesting household spending is starting to wobble.
Manufacturing is also getting shakier. Despite the lift from booming exports, factory production declined in both the fourth and first quarters, and the April report on industrial production on Thursday may reveal even greater weakness. The April employment report showed hours worked in manufacturing posted the largest monthly drop in five years. The increasingly strong downdraft from tighter credit, weaker buying power, and diminished wealth are hitting the economy's goods-producing sector especially hard, because these factors disproportionately reduce spending on big-ticket goods, such as autos, appliances, computers, and business equipment.
Prospects for growth, inflation, and the financial markets are sure to receive heavy attention this week, given that no fewer than seven top Fed officials will be at podiums across the country talking about them. The markets will be especially interested in their opinions about inflation, given the obvious dissention within the ranks illustrated by the split votes at the last two policy meetings. Recently, Kansas City Fed President Thomas Hoenig even raised the topic of eventual Fed tightening. Wednesday's report on consumer prices will further help to shape the inflation debate. Investors will be especially interested in Chairman Bernanke's two speeches, on Tuesday and Thursday, during which he is expected to touch on credit-market issues.