The economy is what it is, and with inflation well below target, it does make sense for the Fed to take a more activist position on monetary policy. At the lower bound for nominal interest rates, that implies ramping up quantitative easing—which is exactly what the FOMC voted in favor of by preventing the Fed's balance sheet from shrinking.

Long-term Treasury rates plummeted over the week, to below 2.70% on Friday. The follow-through impacts to lower mortgage rates will be an important support for the economy in the remaining months of 2010.

Indicators next week should allay fears that the wheels are falling off the economic cart. Building permits are expected to firm a little, and industrial production should jump ahead in July due to unusually high seasonal automotive production rates. Producer prices are expected to be flat, and therefore a non-event.

KEY U.S. DATA RELEASES THIS WEEK

Tuesday, August 17 – Housing Starts and Building Permits (Jul.)

Housing Starts

• IHS Global Insight: 0.545 Mil.
• Consensus: 0.560 Mil.
• Last Actual: 0.560 Mil. (Jun.)

Building Permits

• IHS Global Insight: 0.591 Mil.
• Consensus: 0.579 Mil.
• Last Actual: 0.586 Mil. (Jun.)

What to Look For

• Housing starts are expected to decline 2.7%.
• Building permits to move up 1.4%.

Implications

Single-family permits have dropped for three straight months, payback for the second homebuyers' tax credit. The payback period is probably behind us, but demand for housing remains very weak. For July, we project that permits will inch up 1.4%, to 591,000 units (annual rate). Housing starts, which tend to lag permits by about a month, should drop 2.7%, with an increase in multi-family starts offset by another drop in single-family starts. The housing outlook hinges on the labor market—because we expect subpar employment growth the rest of this year. starts will remain depressed.

Tuesday, August 17 – Producer Price Index (Jul.)

Total

• IHS Global Insight: 0.0%
• Consensus: 0.2%
• Last Actual: -0.5% (Jun.)

Core

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

What to Look For

• Overall producer prices expected to be flat.
• Core inflation to edge up by 0.1%.

Implications

We expect no change in headline prices, with little movement either for energy or food. Core inflation is expected to show a modest 0.1% gain, as demand is not robust enough to create a seller's market, but not weak enough to produce a buyer's market.

Tuesday, August 17 – Industrial Production (Jul.)

• IHS Global Insight: 0.8%
• Consensus: 0.5%
• Last Actual: 0.1% (Jun.)

What to Look For

• We expect industrial production to rise 0.8%.

Implications

Production will get a major shot in the arm from the vehicles sector, as several producers eliminated or curtailed normal downtime around Independence Day. Modest numerical output changes are magnified when normal patterns are violated, and July unit-vehicle production should climb by double-digit percentages. Although July's gain is exaggerated, the third quarter can safely average higher vehicle production than the second, as the Big Three producers have less than 60 days' worth of sales on dealers' lots. Add in several July heat waves and a decent advance in non-auto manufacturing hours worked, and you have the recipe for a solid output gain.