Deficit narrows on weaker trade flows
The international trade deficit on goods and services narrowed slightly in July to $28.8 billion from June's shortfall of $29.1 billion. Both exports and imports declined by a bit more than $2 billion dollars during the month. Consequently, both are showing a deteriorating picture from the past couple of months. A smaller trade deficit in the next few months could help to alleviate the downward pressure on GDP growth. Even if the trade balance remains at July levels in August and September, it will be a smaller shortfall than the previous quarter. When the trade deficit narrows, it makes the net export balance a smaller negative and that has the effect of adding to GDP growth.

If we do see a recession in the U.S. and abroad in the next several months, it is likely that trade flows will diminish. The demand for U.S. exports will decline if foreigners' income declines, and the U.S. demand for imports will drop if our GDP declines.

Philadelphia Fed shows smaller decline
The Philadelphia Fed's business outlook survey stood at -7.3 in September, an improvement from the -23.5 level seen in August. Any negative level of this index means that manufacturing activity is still declining but as the index approaches zero, it means that the declines are moderating. As evident in the chart below, the Philadelphia Fed's business outlook survey correlates well with changes in the index of industrial production. It is likely that industrial production will post a decline in September. More than one factory across the country was disrupted by lack of inventories due to the temporary shutdown of airports and regularly scheduled flights.

Housing starts down from year ago levels
Housing starts dropped 6.9 percent in August after inching up 0.4 percent in July. The bulk of the decline was due to a 22.9 percent plunge in construction of multi-family units. Construction of single family starts decreased 2.4 percent during the month after posting a 1.1 percent drop in July. Despite lower interest rates, it appears that residential activity may be finally headed down. The drop in housing starts bodes poorly for retail spending on furniture and appliances.

It is likely that housing activity in September drops even further and the outlook for the rest of the year may be murky in light of recent events. The Conference Board undertook a survey last week in the wake of the Sept 11 attack. Forty-seven percent of the consumers surveyed said the economy would fall into recession. A recessionary environment isn't typically friendly for the housing market.

It is interesting, though, that the flip side was not stressed - 53 percent of consumers believe that the terrorist attack won't trigger a recession! According to the survey, 90 percent of consumers say that they won't change their spending or vacation plans. Lynn Franco of the Conference Board suggests that these percentages may change as consumers face the reality of layoffs and reduced disposable income.

Inflation in check
The consumer price index inched up 0.1 percent in August after declining 0.3 percent in July. While energy prices were up in the PPI, they were down 1.9 percent in the CPI. This kept the year-over-year increase for the CPI at 2.7 percent in August. Excluding the volatile food and energy components, the CPI increased 0.2 percent in August maintaining the average seen since the beginning of the year. The CPI excluding food and energy prices also rose 2.7 percent in August relative to year ago levels.