Just when the economy seemed to be on a little firmer footing, along came $130 oil. Sky-high crude threatens to be a game changer in the outlook. It’s an even heavier burden for already-shaky consumers. It’s a formidable new obstacle for business costs, profits, and stock prices. And it creates more problems for the Fed in its efforts to keep the economy growing without pushing up inflation.
In this holiday-shortened week, the headline report will be Thursday’s revision to first-quarter GDP. Growth is expected to be revised up, from the original estimate of 0.6%. More important, the revised data are expected to show a better-looking mix of growth: less contribution from inventory building and more from overall demand. Normally, that would imply a little better momentum for the economy heading into the second quarter. However, the possibility of $5.00 gas this summer now threatens to rob whatever forward thrust the economy might have been able to generate.
According to the recently released minutes of the Federal Reserve’s April 29-30 policy meeting, the Fed revised its January economic projections, mainly reflecting the impact of higher oil prices on growth and inflation. The policymakers cut their forecast for growth this year by about one percentage point, to a range of 0.3% to 1.2%, while pushing up its projection for overall inflation by about a percentage point, to between 2.1% and 3.4%. The minutes also showed growing concerns that higher inflation could become entrenched.
And that was when oil stood at about $110 a barrel with widespread expectations that prices would decline by yearend. The emerging problem is consumer spending, which has remained afloat through April, and tax rebates were expected to keep it above water. Now, the expected surge in gasoline prices this summer threatens to negate a major portion, if not all, of the positive effect of the rebates. Current crude quotes and refining margins mean U.S. pump prices will average well over $4.00 per gallon, up from $3.77 on May 19, and they will approach $5.00 is some areas.
Consumers will be one focus of this week’s economic reports, with May consumer confidence on Tuesday and an April reading on personal income and consumer outlays on Friday. Soaring pump prices were a big factor pushing confidence down to a five-year low in April.
Tuesday will also bring news on both home prices and demand: The Standard & Poor’s Case Shiller price index for March is expected to be down again, on top of the 15% drop since its peak in 2006. And April sales of new homes are expected to be weak as well, judging by recent measures of builders’ sentiment.
Finally, the April report on durable goods on Wednesday will be important for its data on orders for capital goods, indicating the extent to which companies are shelving plans for capital spending amid weak demand.
The U.S. markets will be closed Monday, May 26 for the Memorial Day holiday. Here’s the weekly economic calendar from Action Economics, plus other key events to watch.
Top Economic Reports
Reports
Date
Time
For
Median Estimate
Last Period
Consumer Confidence Index
Tuesday, May 27
10:00 a.m.
May
61.3
62.3
New Home Sales (millions)
Tuesday, May 27
10:00 a.m.
April
0.520
0.526
Durable Goods Orders
Wednesday, May 28
8:30 a.m.
April
-0.7%
0.1%
Gross Domestic Product (preliminary)
Thursday, May 29
8:30 a.m.
Q1
1.0%
0.6%
GDP Price Index
Thursday, May 29
8:30 a.m.
Q1
2.6%
2.6%
Personal Income
Friday, May 30
8:30 a.m.
April
0.2%
0.3%
Personal Consumption Expenditures
Friday, May 30
8:30 a.m.
April
0.2%
0.4%
Chicago Purchasing Managers Index
Friday, May 30
9:45 a.m.
May
48.5
48.3
U. of Michigan Consumer Sentiment Index (final)
Friday, May 30
9:55 a.m.
May
62.0
59.5