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Investors have had little economic news to digest this week, and instead have focused on coordinated global responses to the credit crisis. Next week, the economic outlook should move back to the fore as we get a slew of important data points.
We'll kick off the week with a look at the latest government spending imbalances. The government generated more than $100 billion of red ink in both July and August, leading to a $483 billion deficit through the first 11 months of the fiscal year. September figures should bring temporary relief, as corporate quarterly tax payments offset rising spending.
It's unclear how the government will account for the massive spending on recent bailouts, though I suspect most of the disbursements will not be reflected until they are actually made in coming months. As a result, investors are likely to grow increasingly concerned that actual deficits are rising even faster than stated deficits.
In that context, it may be hard for the dollar to hold its recent gains. Global investors are currently seeing the dollar as a "flight to quality" play, but as Uncle Sam opens the liquidity spigot even further in coming months, money could flow right back into currencies that are supported by more conservative central banks.
To be sure, the Bush administration can do little at this point to alter the trajectory of the budget deficit, and the next president will likely be faced with very severe spending choices, even if neither candidate was willing to articulate plans for massive spending cuts or large tax hikes in last night's debate.
We should see a virtual onslaught of economic data on
Wednesday, Oct. 15
, highlighted by:
- The core producer price index (PPI), which is expected to fall 0.2 percentage points (after dropping 0.3 percentage points in August), thanks to the blow-off in commodity prices and the slowing global economy. Inflation trends are also benefiting from the recent dollar rebound, which lowers the cost of imports. However, if the rising budget deficits lead to erosion in confidence for the dollar, inflation concerns may re-emerge. At a minimum, interest rates could move higher to attract sufficient interest in our rising bond issuance.
- Retail sales are expected to fall by a few percentage points, although the fall-off is likely to appear steeper when auto sales are included. As I noted yesterday, retail sales are likely to stay in a funk through the all-important holiday season, which could lead to liquidity concerns for some players.
- We'll also get a reading on the Fed's beige book, crude oil inventories and business inventories on Wednesday. This week's stunning spike in oil and gasoline inventories is welcome relief, and the trend is likely to continue as global production ramps and consumption cools. We may soon see $70 oil if this trend continues, though further pullbacks are likely to be met with OPEC saber-rattling.
Investors should also keep a close on eye on factory data that is set for release next
Thursday, Oct. 16
. We'll get the latest reads on capacity utilization and industrial production. After hovering between 79.7% and 79.9% for the prior months, capacity utilization slipped to 78.7% in August and is expected to have fallen further to 78.0% in September.
If this metric continues to slip, companies are unlikely to spend on any capacity enhancements in 2008. When this figure slumped below 75% early in this decade, factory construction stayed depressed for more than two years.
In a similar vein, industrial production likely fell around 1 percentage point for the second straight month in September. Lower production volumes are likely to yield reduced overhead absorption, which will likely pressure profit margins in a number of industries. However, the blow-off in commodities could have an even stronger positive impact than this emerging negative.
Friday, Oct. 17
, we'll get the latest readings on housing permits and starts as well as the Michigan Consumer Sentiment survey. All of those readings are likely to be quite weak -- far below historical levels -- but are already expected and should have minimal impact on the market.
The key question is whether next week's data points are lagging or leading indicators. For now, investors are in two camps. One believes that the credit crisis is only having a short-term impact, and these metrics are near a bottom. The other camp believes that the metrics will keep worsening well into 2009. We should have a clearer read on whether we can expect an economic rebound in 2009 by the end of this year.
David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.