The Federal Open Market Committee (FOMC) released the minutes from
its June meeting this week, which stated that many committee
members have downgraded their expectations on economic growth and
believe that inflation remains a distant threat. Other economic
reports released this week are strong indicators that the FOMC's
thoughts are right on target. For the week ending July 16, the
S&P 500 Index fell 1.2% to 1,064.88 (for a year-to-date total
return—including price change plus dividends—of about
–3.5%). The yield of the 10-year U.S. Treasury note fell 11
basis points to 2.96% (for a year-to-date decrease of 89 basis
points).
Fed downgrades economic expectations
The minutes from the FOMC's June meeting indicated that the
committee members expect the recovery to continue but at a slower
pace than previously anticipated.
According to the minutes: "Most participants revised down
slightly their outlook for economic growth, and about one-half of
the participants judged the balance of risks to growth as having
moved to the downside. Most participants continue to see the risks
to inflation as balanced. A number of participants expressed the
view that, over the next several years, both employment and
inflation would likely be below levels they consider to be
consistent with their dual mandate, but they anticipated that,
with appropriate monetary policy, both would rise over time to
levels consistent with the Federal Reserve's objectives."
Prices fall for gas and food
The consumer price index, a key indicator of inflation, fell
0.1% in June. Declining energy costs, specifically gas prices, led
to the overall decline.
Core CPI, which doesn't take into account volatile food and
energy prices, rose 0.2% for the month—the largest gain since
October of last year. The increase was due mainly to rising costs
for apparel, medical care, and cigarettes.
The producer price index (PPI)—which tracks prices that
producers receive for finished goods—was down for the third
month in a row, falling 0.5% in June. The decline was mainly due
to the 2.2% drop in prices of consumer food products.
Consumer spending slips again
Retail sales dropped for the second consecutive month, falling
0.5% in June. The significant dip in sales is a sign that
consumers are still acting conservatively when it comes to
discretionary spending. The downshift is disappointing, since
economists are counting on consumer spending—which accounts for
two-thirds of U.S. economic activity—to help pull the economy
out of recession.
The most significant declines came from car dealers and
gasoline stations, where sales were down 2.3% and 2.0%,
respectively, for the month. Sales were also down at sporting
goods, furniture, and building supply stores. Meanwhile,
electronics, appliance, and department stores all reported a jump
in sales, as did nonstore retailers.
Inventories rise
Overall business inventories rose for the fifth month in a row,
jumping 0.1% in May. Retailers and wholesalers reported increases
in surplus, while manufacturers decreased their stockpiles for the
month.
U.S. trade gap widens
The U.S. trade deficit—the difference between the country's
exports and imports—rose to $42.3 billion in May, reaching its
highest level in a year-and-a-half. While U.S. exports were up
2.4%, imports grew faster, expanding 2.9% for the month.
Imports from China continued to rise in May as demand for
computers and apparel increased from both consumers and companies
alike. Meanwhile, U.S. exports included cars, machinery, and
household goods.
Factory production slows
Industrial production rose in June but at a slower rate than in
previous months, increasing only 0.1%. Production in the utilities
and mining sectors grew, while manufacturing output dropped,
indicating that production in our nation's factories, which had
spiked significantly in recent months, is beginning to cool off.
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