The Federal Reserve turned more bearish on the economy this week, downgraded its outlook, and extended Operation Twist. Markets had largely priced in this move, so the response to the announcement was muted. But given the severity of the downgrade, we wonder why the committee did not go for another round of quantitative easing. Some Fed members presumably are not convinced (as Bernanke might be) that the economy needs extra support. Nor are they convinced (as Bernanke is) that extra support would be effective. Nevertheless, we do not think it would take much more for the Fed to pull the trigger on further quantitative easing (QE III). Certainly an unmanaged Greek exit from the Eurozone or a Spanish default would do it. Another disappointing jobs report could, as well. But even without these events, the Fed is still likely to be disappointed with the growth trajectory heading into 2013, making QE III probable by early next year.

Data results this past week (June 18–22) were generally unwelcome. Single-family housing starts and permits increased in May, but existing home sales fell thanks to a drop in investor purchases. Initial unemployment claims retreated, but the four-week moving average still rose to a six-month high. Finally, the Philadelphia Fed manufacturing survey sank to -16.6 in June, signaling steep contraction in that market. Historically, a reading like this would signal contraction in the national ISM manufacturing index and a recession more generally. But there seems to be some disconnect between regional and national surveys now. The Philadelphia Fed sank by even more last August, but the national economy avoided a recession. We expect the same this time, but there is no denying that US manufacturing is being hurt by weakening global and domestic demand.

The upcoming week (June 25–29) is highlighted by the May personal income and spending report, which should be a mixed bag. Income growth was probably steady, though modest, but spending was likely flat after adjusting for the fall in gasoline prices. Meanwhile, a final reading on first-quarter GDP is expected to show an upward revision to 2.2% growth (from 1.9%), due primarily to a favorable trade revision. Finally, indications from permitting decisions and homebuilder sentiment suggest that new home sales edged higher in May.

Beyond the data, this week brings several Fed speeches, which could shed light on the decision to extend Operation Twist instead of expanding the balance sheet, despite significant deterioration in the outlook. On Thursday (6/28), Sandra Pianalto (Cleveland Fed) delivers a speech on housing, human capital, and inequality. Pianalto is the only voting committee member speaking this week, but her speech does not seem to focus on monetary policy. On Friday (6/29), Richard Fisher (Dallas Fed) speaks on the Fed’s ability to stimulate the economy. Also that day, Eric Rosengren (Boston Fed) addresses the latest banking crisis in Europe, and James Bullard (St. Louis Fed) discusses monetary policy and the economy.

Monday, June 25 – New Home Sales (May)

• IHS Global Insight: 0.355 Mil.
• Consensus: 0.345 Mil.
• Last Actual: 0.343 Mil. (Apr.)

What to Look For

A modest increase in new home sales.

Implications

Single-family housing starts and permits were up in May, and builder sentiment was up in a survey conducted in early June. Based on these readings, we project a 3.5% increase to 355,000 units (annual rate).

Tuesday, June 26 – S&P/Case-Shiller Home Price Index (April)

• IHS Global Insight: -2.9%
• Consensus: -2.5%
• Last Actual: -2.6% (Mar.)

What to Look For

A month-on-month price increase, but deterioration in year-on-year comparisons.

Implications

The seasonally adjusted 20-City Composite Index was up in February and March (month on month). For April, we project that it rose again, by 0.2%. This translates into a 2.9% year-over-year decrease.

Tuesday, June 26 – Consumer Confidence (June)

• IHS Global Insight: 62.0
• Consensus: 64.0
• Last Actual: 64.9 (May)

What to Look For

Deteriorating confidence in jobs prospects.

Implications

The Consumer Confidence Index likely lost 2.9 points in June, due to weak jobs and stock market volatility. This would be the fourth consecutive month of declining confidence.

Wednesday, June 27 – Durable Goods Orders (May)

• IHS Global Insight: -0.6%
• Consensus: 0.5%
• Last Actual: 0.0% (Apr.)

What to Look For

A decline in durable goods orders, paired with an improvement in the capital goods market.

Implications

Durable goods orders should falter 0.6% under the weight of yet another bad month for aircraft producers. Boeing only garnered orders for eight aircraft in May, and had some cancellations. The capital goods market should bounce back, not due to inherent strength, but on the back of a recovery from weak turbine orders in April. Core capital goods orders should firm, but anemically, given ongoing recession in Europe and a lackluster outlook in the United States.

Thursday, June 28 – Real Gross Domestic Product (Third Estimate, First Quarter)

• IHS Global Insight: 2.2%
• Consensus: 1.9%
• Last Actual: 1.9% (Second Estimate, First Quarter)

What to Look For

A revision to 2.2%, due to an upward revision in net exports.

Implications

We expect first-quarter GDP growth to be revised up to 2.2%, from the previous estimate of 1.9%, due to an upward revision to net exports. New trade statistics suggest that both exports and imports will be revised down, but that imports will be revised down more than exports, so that trade overall probably added about 0.3 percentage point to GDP growth, instead of subtracting 0.1 percentage point. At this point, though, first-quarter GDP is ancient history, and markets are more concerned about signals that growth has deteriorated since then.

Friday, June 29 – Personal Income, Consumption, and Inflation (May)

Personal Consumption, Nominal

• IHS Global Insight: -0.1%
• Consensus: 0.0%
• Last Actual: 0.3% (Apr.)

Personal Consumption, Real

• IHS Global Insight: 0.0%
• Last Actual: 0.3% (Apr.)

Personal Income

• IHS Global Insight: 0.2%
• Consensus: 0.2%
• Last Actual: 0.2% (Apr.)

Core PCE Inflation

• IHS Global Insight: 0.2%
• Consensus: 0.2%
• Last Actual: 0.1% (Apr.)

What to Look For

Slow and steady growth in personal income, but a decline in spending.

Implications

Personal spending is expected to have fallen 0.1%, thanks to a drop in gasoline prices. But even adjusted for inflation, spending was at best flat last month. Personal income likely continued growing at a 0.2% pace. Core PCE inflation likely accelerated to 0.2%, from 0.1% in April. However, this would translate into a deceleration in year-on-year inflation to 1.8%, from 1.9%.

Friday, June 29 – Reuters/University of Michigan Consumer Sentiment Index (Final, June)

• IHS Global Insight: 74.8
• Consensus: 74.4
• Last Actual: 74.1 (Preliminary, June)

What to Look For

A small improvement in sentiment over the mid-June reading.

Implications

Consumer sentiment will close out the month slightly higher than the mid-June reading, but significantly below the May number. Elevated layoffs and stock market volatility are taking a toll on consumers’ moods. Falling gasoline prices are at best softening the blow.