On-again, off-again policy incentives have injected considerable noise into the monthly retail sales and housing numbers. Further evidence of this will come in the housing starts and permits data for May, which are expected to show sharp declines after the expiry of the second version of the homebuyers' tax credit on April 30.

Looking beyond these distortions, though, evidence next week will support the underlying picture of a solid U.S. production recovery with virtually no inflationary pressures. Industrial production is expected to leap by 1.5% in May, while both consumer and producer prices are projected to fall in response to recent declines in energy prices.

The Federal Reserve continues to be in a position to provide extraordinary amount of monetary policy accommodation, and we expect no change in that policy stance at the FOMC meeting in the following week. Thus, the recovery is still in a rather unusual "sweet spot" involving relatively high productivity growth and relatively low inflation. Business and consumer confidence are slowly moving up in recognition of these favorable trends, but spending resistance nevertheless remains unusually elevated.

KEY U.S. DATA RELEASES THIS WEEK

Wednesday, June 16 – Housing Starts and Building Permits (May)

Housing Starts

• IHS Global Insight: 0.610 Mil.
• Consensus: 0.648 Mil.
• Last Actual: 0.672 Mil. (Apr.)

Building Permits

• IHS Global Insight: 0.563 Mil.
• Consensus: 0.625 Mil.
• Last Actual: 0.610 Mil. (Apr.)

What to Look For

• Starts to decline 9%, while permits are down 8%—payback for the homebuyers' tax credit.

Implications

Single-family permits dropped 10% in April, most likely because of the expiration of the second homebuyers' tax credit. We expect this decline to be reflected in May's single-family housing starts—with total housing starts dropping about 9%, to a 610,000 annual rate. We are also expecting another double-digit drop in single-family permits, further payback for the tax credit, and for permits to drop to a 563,000 annual rate.

Wednesday, June 16 – Producer Price Index (May)

Total

• IHS Global Insight: -1.0%
• Consensus: -0.5%
• Last Actual: -0.1% (Apr.)

Core

• IHS Global Insight: +0.1%
• Consensus: +0.1%
• Last Actual: +0.2% (Apr.)

What to Look For

• Overall producer prices to fall 1.0% in May, led by a steep drop in energy prices.
• Core prices are expected creep up by 0.1%.

Implications

Producer prices for gasoline should come in around 10% lower than in April. Food prices probably fell too, as the surge in March gradually unwinds. We expect core inflation to remain subdued, at 0.1%. The recent declines in commodity prices should start to become evident in crude and intermediate materials prices.

Wednesday, June 16 – Industrial Production (May)

• IHS Global Insight: +1.5%
• Consensus: +0.8%
• Last Actual: +0.8% (Apr.)

What to Look For

• Industrial production fired on all cylinders in May, rising 1.5%.

Implications

The restocking process is driving manufacturing production sharply higher. Manufacturing hours surged 1.0%, electricity production rebounded on warmer weather, and motor vehicle production rose to its highest level in 20 months.

Thursday, June 17 – Consumer Price Index (May)

Total

• IHS Global Insight: -0.2%
• Consensus: -0.1%
• Last Actual: -0.1% (Apr.)

Core

• IHS Global Insight: +0.1%
• Consensus: +0.1%
• Last Actual: 0.0% (Apr.)

What to Look For

• Overall consumer prices should drop for the second month in a row, falling 0.2% in May on sharply lower gasoline prices.
• Core prices are expected to edge 0.1% higher.

Implications

Pump prices normally rise sharply at this time of year, but we estimate that they fell slightly in dollar terms during May, which should translate into a 6.3% seasonally adjusted decline. That alone takes 0.3 percentage point off the CPI. The overall CPI decline should be moderated by rising food prices and a modest 0.1% increase in core prices. Core prices have moved little in recent months, as retailers find consumers reluctant to buy without a price incentive.