U.S. equity markets staged a nice recovery this week from last Friday's sharp sell-off, as earnings in the nonfinancial sector did not come under as much downward pressure as earlier feared, and expectations of Fed action to reduce rates on October 31 gained some momentum, aided by some supportive speeches from FOMC members.

Next week will be a rather full week of economic releases, but the highlights will be a relatively strong third-quarter real GDP report (Global Insight is forecasting 3.4% growth), moderate payroll employment gains near 100,000 in October, and a tame core PCE price report in September. In addition, the Federal Reserve's FOMC meets on Thursday October 31, and we expect it to vote to lower the federal funds rate by 25 basis points to 4.50%, to cushion the slowdown in the economy and partially offset the general tightening in credit conditions that we have seen in the past several months.

KEY U.S. DATA RELEASES THIS WEEK

Wednesday, October 31 – Employment Cost Index (percent change, Q3)

Global Insight: 0.8
Consensus: 0.9
Last Actual: 0.9 (Q2)

WHAT TO LOOK FOR

• A slight moderation in the growth of employment costs to 0.8%

IMPLICATIONS

With labor markets showing no clear tendency to tighten or loosen so far this year, we expect only a slight deceleration in employment costs during the third quarter—from 0.9% growth in the second quarter to 0.8% in the third. Although this is the proper direction from the perspective of inflation control, the result will have little effect on the Fed's policy decisions for the remainder of 2007.

Wednesday, October 31 – Real Gross Domestic Product, Advance (Percent change, Q3)

Global Insight: 3.4
Consensus: 3.1
Last Actual: 3.8

WHAT TO LOOK FOR

• Real GDP expanded by a solid 3.4% in the third quarter.
• Foreign trade to add 1.1 percentage points to growth.
• Consumer spending to bounce back and grow by 3.6%.
• Housing to be a large negative, but business investment to be positive.

IMPLICATIONS

Real GDP growth should come in at a robust 3.4% in the third quarter, not far below the second quarter's 3.8%. Once again, foreign trade will be the star performer, with exports up around 16%, their strongest increase in almost four years. We expect trade to add 1.1 percentage points to growth. Consumer spending will also help, bouncing back by 3.6% after the second quarter's anemic 1.4% increase. Residential investment will continue to plunge, while business investment should edge higher. So the third quarter was solid, but the question is what happens next. Housing activity is now in free-fall, and consumer spending growth appears to be slowing. We expect fourth-quarter growth to weaken to just 1.5%.

Wednesday, October 31 – Construction Put in Place (Percent change, Sep.)

Global Insight: -0.4
Consensus: -0.5
Last Actual: 0.2

WHAT TO LOOK FOR

• Total construction activity to decline by 0.4%.
• Housing to be a large negative.
• Public and nonresidential construction to be positive.

IMPLICATIONS

We are expecting another set of solid numbers for nonresidential and public construction. But these gains will be more than offset by another big drop in residential construction in September. Indeed, single-family residential construction may drop more than 4%. We are also expecting multi-family construction to drop for the 10th straight month. Adding it all up, total construction should drop 0.4%.

Wednesday, October 31 – FOMC Rate Decision (Percent)

Global Insight: 4.50
Consensus: 4.50
Last Actual: 4.75

WHAT TO LOOK FOR

• The FOMC is expected to vote to reduce the target federal funds rate by 25 basis points.

IMPLICATIONS

Lower rates will assist in cushioning the slowdown in the economy, and promoting financial stability. Recent reports on the economy have been mixed—generally speaking, they point to much slower growth in the fourth quarter—and the housing market continues to spiral downwards, suggesting downside risks to the outlook. Financial markets are showing better stability than in August and September, but the mortgage securities market continues to be under downward pressure and bank capital reserves have take a serious haircut from recent write-offs. Credit conditions have tightened.

Thursday, November 1 – Personal Income, Consumption, and Prices (Percent change, Sep.)

Personal Consumption, nominal

Global Insight: 0.5
Consensus: 0.4
Last Actual: 0.6

Personal Consumption, real

Global Insight: 0.3
Last Actual: 0.6

Core PCE Price Index, m/m

Global Insight: 0.1 (1.7% y/y)
Consensus: 0.2 (1.8% y/y)
Last Actual: 0.1 (1.8% y/y)

Personal Income

Global Insight: 0.5
Consensus: 0.4
Last Actual: 0.3

WHAT TO LOOK FOR

• Real consumer spending to advance by 0.3%
• Core PCE price index to move up by 0.1%

IMPLICATIONS

According to the latest employment report, average hourly earnings growth was a robust 0.4%, while total hours worked edged up 0.1% in September. These gains should translate into about a 0.5% increase in private wage and salary disbursements, which makes up about 45% of personal income. We are expecting the remaining personal income categories to also grow about 0.5%. Personal income, therefore, is projected to have increased 0.5% in September. Core retail sales (the portion of retail sales that feed the consumption estimates in the national income accounts) increased 0.5% in September. Spending on services probably slowed to a 0.4% growth rate, from 0.7% in August, which was boosted by sharply higher electricity consumption on warm weather. Overall, we expect consumer spending to increase 0.5%. Adjusted for inflation, the increase will be a moderate 0.3%. Real spending has been holding up quite well in the face of higher gasoline prices, weakening consumer sentiment, and declining home prices.

We expect core PCE inflation to remain at 0.1% in September, albeit by a narrow margin—an uptick to 0.2% would not come as a surprise. On a year-on-year basis, look for core PCE inflation to slide further into the Fed's 1–2% comfort zone, slipping to 1.7% from 1.8% in the previous month. Core inflation continues to edge downwards in the Fed's comfort zone—in the next few months we do not anticipate that this will be an obstacle to the Fed lowering rates.

Thursday, November 1 – ISM Manufacturing Survey (Index, Oct.)

Global Insight: 52.0
Consensus: 51.5
Last Actual: 52.0

WHAT TO LOOK FOR

• The ISM index should remain basically unchanged in October.

IMPLICATIONS

The ISM-manufacturing index is expected to hold steady at 52.0 in October. The manufacturing sector is drifting, with just a little positive momentum as rising exports and very modest inventory building battle it out against the drag from housing. A key item to watch will be export orders—modest declines in the index would not be an issue, but any serious downward pressure would indicate that overseas markets are cooling off more rapidly than we would like to see at this juncture of the business cycle.

Thursday, November 1 – Motor Vehicle Sales (Millions, SAAR, Oct.)

Global Insight: 16.4
Consensus: 16.0
Last Actual: 16.2

WHAT TO LOOK FOR

• Total sales to pick up to about 16.4 million units.

IMPLICATIONS

Higher incentives and more rental fleet sales will inch sales in October a bit higher than the prior month. A weak economy, high oil prices, and the housing crisis will limit the rise, however, and Global Insight sees sales averaging about 16.2 million units in the fourth quarter of 2007, which is well below trend.

Friday, November 2 – Nonfarm Payrolls, change (Thousands, Oct.)

Global Insight: 100
Consensus: 85
Last Actual: 110

WHAT TO LOOK FOR

• Payroll employment to expand by 100,000 jobs.

IMPLICATIONS

We expect payroll employment to rise by 100,000 in October, just slightly below the 110,000 increase in September. The labor market is slowing, but it appears to be a gradual deceleration rather than a sudden stop. Higher unemployment insurance claims in the past two weeks suggest that November will be worse, but the claims figures have given false alarms before, and a higher trend is not yet clearly established. We expect the unemployment rate to be steady this month at 4.7% after last month's 0.1% increase, and hourly earnings growth to slow to 0.3% from 0.4%.