In next week's indicators, real consumer spending is expected to be about flat in March, and will barely eke out a positive gain in the first quarter. Motor vehicle sales are expected to drop well below 15 million units in April, indicating that declining vehicle sales and output will be a major drag on the economy in the second quarter. Even with declining final domestic demand, a solid gain in inventories will float the economy to a small 0.8% gain in real GDP during first-quarter 2008. However, a second-quarter correction to the first-quarter inventory gain is pointing to a negative second quarter, notwithstanding some expected boost to consumption in June from the tax rebates. Finally, payroll employment is expected to drop by 100,000 in April—this will mark the fifth consecutive month of escalating declines in private payrolls.

KEY U.S. DATA RELEASES AND EVENTS THIS WEEK

Wednesday, April 30 – Real Gross Domestic Product, Advance (Q1)

Global Insight: +0.8%
Consensus: +0.4%
Last Actual: +0.6% (Final Q4)

What to Look For

·                  Overall real GDP to squeak forward by 0.8%.

·                  All of the growth, however, will come from a rise in inventories.

Implications

Despite gathering evidence that the economy has slipped into recession, first-quarter real GDP is still expected to show an increase (of 0.8%) that is a little better than the fourth-quarter gain (of 0.6%). That's the good news. The bad news is that all of the growth should come from inventories, which are expected to rise slightly, rather than fall as they did in the fourth quarter. This is a negative signal for the second quarter, when we expect GDP to decline, with both final sales and inventories falling. It may well be that this downturn never sees two successive quarterly declines in real GDP (the third quarter should be positive, helped by tax rebates). But nor did the 2001 downturn. We still think that this episode, like 2001, will ultimately be classified as a recession.

Wednesday, April 30 – FOMC Rate Decision

Global Insight: 2.00%
Consensus: 2.00%
Last Actual: 2.25%

What to Look For

·                  The Fed is expected to reduce the federal funds rate by 25 basis points, to 2.00%.

Implications

The Federal Open Market Committee will likely vote to reduce the federal funds rate by 25 basis points, to 2.00%, on Wednesday. Overall economic conditions have continued to weaken in recent months, and banking/financial sector stresses remain high. There are still downside risks to growth in the second quarter of 2008, and the second half of the year. The Federal Reserve's staff has lowered its real growth forecasts for 2008 and 2009. Although top-level inflation pressures remain high, core inflation measures have eased back toward 2%, while inflation compensation measures have dropped back from their peaks of several weeks ago.

Thursday, May 1 – Personal Income, Consumption, and Prices (Mar.)

Personal Consumption, Nominal
Global Insight: +0.3%
Consensus: +0.2%
Last Actual: +0.1% (Feb.)

Personal Consumption, Real
Global Insight: +0.1%
Last Actual: 0.0% (Feb.)

Core PCE Price Index
Global Insight: +0.1%
Consensus: +0.1%
Last Actual: +0.1% (Feb.)

Personal Income
Global Insight: +0.3%
Consensus: +0.4%
Last Actual: +0.5% (Feb.)

What to Look For

·                  Real consumer spending to be up only 0.1% in March.

·                  Core PCE deflator to rise by 0.1%.

Implications

Core retail sales increased 0.3% in March. Light-vehicle sales dropped from a 15.3-million-unit annual rate in February to 15.1 million in March. Spending on services should post a modest 0.5% gain, and spending on fuel oil will spike because of higher prices. Added together, we expect that consumer spending increased 0.3% in March; adjusted for inflation, the increase will be only 0.1%. Real consumer spending was likely close to flat in the first quarter. With residential investment expected to decline sharply, that yields a probable decline in final domestic demand during the first quarter. However, a solid gain in inventories and still-good export levels will bootstrap overall real GDP to a small 0.8% advance.

We expect the core PCE deflator to edge 0.1% higher in March, repeating the increase of the previous month. This second soft reading deals a friendly card to inflation psychology, as it implies a steady year-on-year rate of 2.0%. That would make it three months in a row at the top of the Fed's 1–2% "comfort zone," following two months above that zone at the end of 2007. Overall, recent core inflation measures, along with readings on inflation compensation, have been surprisingly well-contained.

Thursday, May 1 – Construction Spending (Mar.)

Construction Put in Place
Global Insight: -0.7%
Consensus: -0.6%
Last Actual: -0.3% (Feb.)

Construction Excl. Residential Improvements
Global Insight: -1.3%
Last Actual: -1.3% (Feb.)

What to Look For

·                  Total private construction spending to drop for the fourth consecutive month.

Implications

Private nonresidential construction spending dropped for the third straight month in February. The outlook for this sector is grim because of tight credit markets, soaring construction costs, the housing downturn, and job losses. For March, we are projecting a fourth consecutive drop. Single-family home construction fell more than 5% for the third time in four months in February. Based on the latest housing starts numbers, another 5% drop is likely in March. We are also expecting multi-family building construction to drop for the 16th month in a row. Public construction should post a small gain, though, and residential improvements may see another solid increase. Added together, we project that construction spending fell 0.7% in March; excluding improvements, the drop will be 1.3%.

Thursday, May 1 – ISM Manufacturing Index (Apr.)

Global Insight: 47.8
Consensus: 48.0
Last Actual: 48.6 (Mar.)

What to Look For

·                  The overall index is expected to be roughly unchanged.

Implications

The ISM manufacturing index should turn out a bit weaker than in March, but not by much. Regional reports did not show any signs of improvement, with the Philadelphia Federal Reserve index (which has a long track record) showing the steepest rate of decline. Look for continued evidence of solid overseas demand, a trend that has been keeping the manufacturing sector from sinking into a deeper recession.

Thursday, May 1 – Motor Vehicle Sales (Apr.)

Global Insight: 14.6 Mil.
Consensus: 15.1 Mil.
Last Actual: 15.1 Mil. (Mar.)

What to Look For

·                  Light-vehicle sales are expected to fall well below the 15-million-unit mark.

Implications

The pressure of soaring oil prices and the continued credit crisis will drive auto sales to new lows in April, at 14.6 million units, down from 15.1 million in March (annual rates). The recent downward trend in sales is pulling down planned production rates, and another decline in output during the second quarter will contribute to a decline in overall real GDP.

Friday, May 2 – Employment Report (Apr.)

Nonfarm Payrolls

Global Insight: -100,000
Consensus: -78,000
Last Actual: -80,000 (Mar.)

Unemployment Rate

Global Insight: 5.2%
Consensus: 5.2%
Last Actual: 5.1% (Mar.)

Average Hourly Earnings

Global Insight: +0.3%
Consensus: +0.3%
Last Actual: +0.3% (Mar.)

What to Look For

·                  Payroll employment is expected to decline by 100,000 jobs.

Implications

Rising unemployment insurance claims point to further deterioration in the labor market during April. We expect a 100,000 drop in payroll employment, the largest decline so far in this downturn, and a 0.1-percentage-point increase in the unemployment rate, to 5.2%. This will mark the fifth consecutive month of escalating declines in private payrolls. Further reductions in payroll jobs, combined with recessionary levels for consumer confidence, will be the prime motivations for the FOMC to reduce the federal funds rate by a further 25 basis points at its meeting on April 30.