Economic indicators on hiatus Econoday Simply Economics 6/26/00 By Evelina M. Tainer, Chief Economist

Waiting…
Market activity gets more erratic during the course of the summer when volume is down. Market activity can also get erratic around FOMC meetings as equity investors try to anticipate what the Fed is going to do.

We looked at the behavior of the Dow Jones Industrial Average and the NASDAQ composite index over the past 12 months, in the week before as well as the day before the FOMC announcement, as well as the day of the meeting and the day after. The patterns aren’t entirely conclusive. For instance, the NASDAQ composite index declined five times (out of eight) in the week before the FOMC meeting since June 1999 when the Fed first began its tightening cycle. During the same time period, the Dow Jones Industrials only decreased three times in the week before the FOMC meeting. In the day immediately preceding the FOMC meeting, the Dow and the NASDAQ each rose five out of eight times.

On the day of the Fed meeting, whether the Fed raised rates or not, the NASDAQ composite closed higher. This index increased yet again on the day following the meeting on six of the past eight occasions. In contrast, the Dow rose only five out of eight times on the day of a Fed announcement and five out of eight times on the day after the announcement.

This week’s market drop in the major indices was not out of line with the historical experience of the past year, in advance of a FOMC meeting. Incidentally, only the Russell 2000 remains above yearend levels.

Anticipating…
Economic data was not available for bond investors to assess conditions – and help them determine which way the wind was blowing by the Fed. Early in the week, New York Fed president William McDonough appeared to soften his stance. He had been much more hawkish and indicated that economic conditions were still ripe for further rate hikes earlier in the month. Yet, he conceded that some of the recent data did point to moderating consumer demand. Ed Kelley however, spoke during the week and still indicated that rate hikes were a good possibility in coming months. On the whole, the tone became somewhat more negative during the course of the week. Moreover, yields on Treasury securities rose as increased supply of corporate securities loomed.

Markets at a Glance
Treasury Securities	12/31/99	June 16	June 23	Weekly Change
30-year Bond	6.48%	5.87%	c6.04%	+ 17 BP
10-year Note	6.43%	5.97%	6.18%	+ 21 BP
5-year Note	6.34%	6.18%	6.37%	+ 19 BP
2-year Note	6.24%	6.35%	6.54%	+ 19 BP
Stock Prices
DJIA	11497*	10449*	10405*	- 0.4 %
S&P 500	1469*	1464*	1442*	- 1.5 %
NASDAQ Composite	4069*	3861*	3847*	- 0.4 %
Russell 2000	505*	514*	510*	- 0.8 %
Exchange Rates
Euro/$	1.0008	0.9658	0.9364	- 3.0 %
Yen/$	102.40	106.31	104.61	- 1.6 %
Commodity Prices
Crude Oil ($/barrel)	$25.60	$32.35	$32.20	- 0.5 %
Gold ($/ounce)	$289.60	$291.50	$285.00	-2.2 %
(BP = basis points; stock price indices are rounded)

International trade deficit barely narrows
The international trade deficit on goods and services narrowed by a smidgen in April to $30.4 billion, from the March deficit of $30.6 billion. Exports were about unchanged for the month, while imports edged down 0.2 percent in April. Both exports and imports had jumped sharply in March. The monthly trade deficit averaged $28.7 billion in the first quarter. Even if the April deficit remains unchanged for the rest of the quarter (and that is unlikely), it suggests that the foreign sector will take a chunk out of GDP growth in the April to June period.

In the old days, financial markets would sell off on the news that the international trade deficit worsened – the foreign exchange value of the dollar would decline vis-à-vis other currencies; bond and stock prices would tumble. Eventually market players became more sophisticated. That is, the trade balance became less meaningful and market players focused on import and export demand separately. Export demand reflects the strength of foreign economies. But it helps to expand economic activity domestically. In contrast, import demand reflects domestic strength in an economy. The faster imports grow, the greater the demand for consumer goods and capital equipment. Since the goods are produced overseas, these are not included in our GDP and GDP growth is reduced domestically.

During the second half of the 1990s, healthy import growth helped keep down price pressures in the United States as foreign economies produced goods for consumers and businesses. Now market players focus on the distribution of imports. When U.S. businesses purchase foreign-produced capital equipment, it is viewed as capital enhancing. This is a favorable development for the financial markets because it has the potential to accelerate productivity growth. In contrast, market players aren’t favorably disposed to increased demand for consumer goods.

The chart above shows the year-over-year change in import demand by end-use commodities for the year-to-date period ending April. The big spurt is industrial supplies and materials – mainly reflecting higher oil prices. Non-auto capital goods have grown more rapidly than auto & parts and nonfood consumer goods. This would generally be considered more favorable than a surge in consumer products.

The bottom-line on international trade? The international trade deficit is worsening at the start of the second quarter relative to the first quarter. This will act as a drag on GDP growth. Weaker GDP growth may be viewed in a friendly light by market players. However, if imports continue to grow this rapidly, it suggests that consumer demand and business demand is not cooling down. It will worry Fed officials.

THE BOTTOM LINE
Economic news was sparse this week and not enough to give Fed officials food for thought as we approach next week’s FOMC meeting. What will Fed officials be looking at? While the employment situation clearly showed signs of moderation, the numbers were too weak to be believable. Fed officials will probably discount them to a large degree. Retail sales and housing starts have moderated in the past several months. These figures will be more meaningful to the Fed. However, the data is not sufficiently decisive.

It is really a toss up whether the Fed will announce a rate hike of 25 basis points at the end of the meeting on Wednesday. Most market players don’t expect a rate hike this week.

Looking Ahead: Week of June 26 to June 30
Market News International compiles this market consensus which surveys about 20 economists each week.

Monday
The consensus shows existing home sales are expected to decline one percent in May to a 4.83million-unit rate. This is not quite as low as the January and February levels, but still points to a downward trend in home resales. The forecasts range from a high at a 5.00 million-unit rate to a low at a 4.65 million-unit rate.

Tuesday
Economists are predicting that the Conference Board’s consumer confidence index will decrease modestly in June to 140, from a level of 144.4 in May. Even with the slight dip, it keeps confidence levels about March and April and in line with current high trends. The range of forecasts runs from 137.0 to 143.0.

Today is the first day of the two-day FOMC Meeting. A two-day meeting takes place twice a year when Fed officials prepare their remarks for the semi-annual Humphrey-Hawkins report. Incidentally, the Humphrey-Hawkins Act expired this year, but Greenspan has continued to testify before the Senate and House Committees in February and July.

Wednesday
Durable goods new orders are predicted to jump 2.5 percent in May after plunging 6.5 percent in April. Part of the April drop was due to the volatile transportation sector, but a good chunk of the drop was due to a plunge in new orders for electronic components. The range of forecasts for this indicator is typically wide; this month the forecasts range from +0.3 percent to +5.5 percent.

Today is the second day of the FOMC meetingThe consensus among economists and market participants is that the Fed will not raise rates today. However, the federal funds futures market shows a 25 percent chance of a 25 basis point rate hike.

Thursday
Market participants are expecting new jobless claims to decrease 2,000 in the week ended June 24 from last week's 302,000 level. Claims are likely to be rather volatile in the next several weeks since summer factory shutdown schedules are not exact from year to year.

The Commerce Department will report its final estimate for first quarter GDP today. Economists are not expecting any change from the preliminary estimate of 5.4 percent released last month. Final sales shouldn’t be revised either; the preliminary estimate revealed a 6.9 percent growth rate in the first quarter. The implicit price deflator grew at a 2.7 percent rate in the first quarter, up from the 2 percent rate recorded in the final three months of 1999. No revisions are expected for the deflator either.

New home sales should record a decline of 1.5 percent in May to an 895,000-unit rate. Sales had dropped 5.8 percent in May. If this forecast were realized, it would bring new home sales down to their lowest level since November 1999. The range of forecasts for this indicator runs from an 880,000-unit rate to a 970,000-unit rate.

Friday
Market participants are expecting personal income to rise 0.2 percent in May after gaining 0.7 percent in each of the two months. The smaller rise reflects more moderate employment growth coupled with a smaller gain in average hourly earnings. Personal consumption expenditures should post a 0.3 percent gain in May, less than the increases of the past couple of months. This incorporates the sluggish retail sales figures reported earlier this month. The personal income forecasts range from no change to +0.6 percent; personal consumption expenditure forecasts range from no change to +0.3 percent.

The Chicago purchasing managers’ index is expected to edge down to 53.5 in June. Any level above 50 percent points to an expanding manufacturing sector. Market players will also focus on the prices paid component. In May, prices paid fell back to 64.4 from 69.4 in April.