The Federal Reserve's FOMC meets on August 10. While the Fed is expected to keep interest rates unchanged in the current range of 0.00–0.25%, the FOMC will have to tone down its assessment of the economy in light of the recent weak indicators on real GDP growth, real consumption, and employment.

There is also a distinct possibility that the FOMC will moved to adjust its tactics on managing balance-sheet assets, with a view to re-invest principal repayments so as to keep the balance sheet steady, instead of gradually declining, in order to provide more support for the recovery. Indeed, markets have already priced in a move along these lines, so FOMC inaction could precipitate an adverse market reaction, especially in the bond markets.

KEY U.S. DATA RELEASES THIS WEEK

Tuesday, August 10 – Productivity (Preliminary Q2)

Nonfarm Business Productivity

• IHS Global Insight: -0.3%
• Consensus: 0.2%
• Last Actual: 2.8% (Final Q1)

Unit Labor Costs

• IHS Global Insight: 0.6%
• Consensus: 1.5%
• Last Actual: -1.3% (Final Q1)

What to Look For

• Productivity to decline slightly in the second quarter.

Implications

The recent surge in productivity is over. This may not be entirely bad news. For the second quarter, we project that productivity growth dropped 0.3 percentage point, on a 2.6% rise in output and a 2.9% increase in hours. In recent quarters, companies have been able to raise productivity by cutting costs and working their employees harder. Going forward, companies will need to add workers to raise output. This increase in employment is what the economy needs to get back to self-sustained growth. Unit labor costs should rise only 0.6% in the second quarter, on a 0.3% increase in hourly compensation and a 0.3% drop in productivity.

Tuesday, August 10 – FOMC Rate Decision

• IHS Global Insight: 0.00–0.25%
• Consensus: 0.00–0.25%
• Last Actual: 0.00–0.25%

What to Look For

• The FOMC is expected to keep rates unchanged in the 0.00–0.25% range at its August 10 meeting.
• There is a high likelihood that the Fed will modify its balance-sheet tactics. Mortgage principal repayments to the Fed are likely to be reinvested in new mortgage debt and Treasury bonds so as to keep the Fed's balance sheet stable, rather than gradually declining.

Implications

The FOMC is expected to keep rates unchanged in the 0.00–0.25% range at its August 10 meeting.

The Federal Reserve is expected to tone down its language on the recovery, consistent with recent economic indicators and its own Beige Book survey, and potentially reference higher levels of uncertainty in the outlook. There is a high likelihood that the Fed will modify its balance sheet tactics. Mortgage principal repayments to the Fed are likely to be reinvested in new mortgage debt and Treasury bonds so as to keep the Fed's balance sheet stable, rather than gradually declining. This would be tantamount to a modest easing in monetary conditions, and the markets have for the most part discounted this action. There is also a relatively low probability that the Fed could vote to expand its balance sheet by several hundred billion dollars in a move to beef up quantitative easing measures.

Wednesday, August 11 – Trade Balance (Jun)

• IHS Global Insight: -$44.0 Billion
• Consensus: -$42.1 Billion
• Last Actual: -$42.3 Billion (May)

What to Look For

• The trade deficit is expected to widen to $44.0 billion in June, from $42.3 billion in May.

Implications

Little change is expected in exports, but imports should rise again as restocking continued. The burst of imports associated with restocking is probably reaching its climax, though, since underlying final sales growth remains weak and firms will want to avoid an excessive inventory buildup. Note that the Commerce Department assumed an even bigger widening in the June trade gap for its initial estimate of second-quarter GDP, so an outcome in line with our projection would prop up second-quarter growth.

Friday, August 13 – Retail Sales (Jul.)

Total

• IHS Global Insight: 0.5%
• Consensus: 0.5%
• Last Actual: -0.5% (Jun.)

Less Autos

• IHS Global Insight: 0.3%
• Consensus: 0.3%
• Last Actual: -0.1% (Jun.)

What to Look For

• Retail sales are expected to rise 0.5% in July; excluding autos, sales should be up 0.3%.

Implications

Auto sales rose modestly in July, after a poor showing in June. Building material store sales probably fell again. Other major retail sale channels are expected to exhibit modest growth. After adjusting for seasonality, gasoline prices rose in July and should push up sales at gasoline stations.

Friday, August 13 – Consumer Price Index (Jul.)

Total

• IHS Global Insight: 0.3%
• Consensus: 0.2%
• Last Actual: -0.1% (Jun.)

Core

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

What to Look For

• June consumer prices should rise by 0.3% in the headline number, although core inflation likely remained in check with a token 0.1% advance.

Implications

Energy prices should drive the headline number up. Although pump prices were flat, they usually fall in July, so that will translate into a seasonally adjusted increase in gasoline prices of around 5%. But core inflation is expected to remain tame.

Friday, August 13 – Michigan Consumer Sentiment Index (Preliminary Aug.)

• IHS Global Insight: 69.0
• Consensus: 69.5
• Last Actual: 67.8 (Final July)

What to Look For

• The preliminary Reuters\University of Michigan Index of Consumer Sentiment for August is expected to be 69.0.

Implications

This is a slight improvement for the August preliminary reading, but still far below June. Consumers continue to feel the pain of depressed household net worth, poor labor market conditions, and high debt levels.