The key economic report will be the Personal Income and Outlays release on Friday, which should show a July drop in real personal income and consumption, a jump in prices, and another unsettling core inflation reading, according to the analysts at Global Insight. Upwardly revised second quarter GDP estimates on Thursday should show that the economy grew 2.7 percent in the second quarter, despite job losses, with net exports accounting for all of the growth. Existing home sales on Monday should show a small increase in July sales and new home sales on Tuesday a small drop. These numbers, however, are of historical interest. The housing outlook has worsened recently because of deteriorating credit markets. We expect new and existing home sales to continue to fall for the rest of this year. Finally, we are expecting no change in durable goods orders. Domestic demand is weak; exports and import substitution represent the strength in this market. Export momentum may fade in coming months given the weak performance of the European and Japanese economies.
Existing home sales have hardly budged in eight months. Over this period, the pending home sales index (PHSI) has also been trendless, although it did bounce back in June. The May and June PHSI readings point to small increases in existing home sales during July and August. Afterward, we expect sales to slide because of deteriorating credit markets.
The housing outlook has worsened recently. Credit is getting tighter for both builders and homeowners. Existing home sales have stabilized because plummeting prices of foreclosed homes have spurred sales. New home sales have continued to drop, however, because builders cannot slash prices as ruthlessly as banks have on foreclosed homes.
Export orders have been driving the bus for durable goods industries for an extended period of time, but reports of a tightening in credit conditions in overseas markets could be a signal that tailwinds from export sources are likely to become much less forceful.
The revision will emphasize the extent to which second-quarter growth was supported by foreign trade. Domestic demand growth was negative in the advance release and should remain so in the revision. We do not think that trade will be able to prevent a slowdown in growth in the second half of the year. We expect slower growth in the third quarter (around 1.5 percent) and an outright decline of 0.7 percent in GDP in the fourth quarter as the fiscal stimulus effect fades and consumer spending weakens.
We are expecting the stimulus rebates to add about $6.0 billion (which annualizes to $72 billion) to transfer payments in July, down from June's contribution of $12.5 billion ($150 billion annualized). Private wage and salary disbursements will be flat, but possibly negative. Overall, for July, we are expecting a 0.5 percent drop in personal income.
On a year-on-year basis, look for core PCE to rise 2.4 percent, a tick faster than the 2.3 percent rate recorded in the previous month. The steady drift above the top of the Federal Reserve's presumed 1.5 to 2 percent target band will make it harder for the Fed to downplay inflation risks as we move through the second half of the year. Nevertheless, dismal growth prospects should keep the federal funds rate at 2.0 percent into the first half of 2009.
Consumer spending fell in inflation-adjusted terms in June, and will probably fall again in July. For the third quarter overall, we expect a small inflation-adjusted increase in spending of about 0.5 percent. But there is a growing risk that the third quarter will see the first outright decline in consumer spending since the end of 1991.
Consumer attitudes are getting a lift from falling gasoline prices. We expect that the Conference Board's consumer confidence index will edge up to 53.0 in August from 51.9 in July, while the University of Michigan's consumer sentiment index rises to 62.2 from 61.2. Yet, both of these readings will remain in a recessionary range, held down by concerns over rising unemployment, declining real wages, falling home prices, and tightening credit conditions.
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