Europe sinks deeper into recession. European data this past week pointed to sharper deterioration. First, the United Kingdom reported that its GDP contracted 0.7% (quarter on quarter) in the second quarter—a nasty surprise, as this was far deeper than anyone expected. An extra holiday resulting from the Queen’s Diamond Jubilee contributed, but this was still the third consecutive quarter of contraction and the sharpest since early 2009. The economy should recovery in the second half of the year thanks in part to the Olympics, but tight fiscal policy, high unemployment, and ongoing Eurozone debt problems will weigh on UK economic growth. The government shows no inclination to relent on fiscal austerity, but the Bank of England will likely do another round of quantitative easing later this year. Meanwhile, lending to Eurozone businesses disappointingly fell again in June, confirming that the European Central Bank’s €1-trillion Long-Term Refinancing Operation to European banks has not fed through to private-sector lending. Of course, weak lending also reflects limited demand for credit. Nevertheless, the concern is that companies that want to borrow are finding it hard to do so, as tight credit conditions handicap Eurozone growth prospects. This will intensify pressure on the ECB to take interest rates even lower, which we expect it to do, possibly in October.

No additional alarm bells for Federal Reserve in latest GDP numbers. GDP growth for the second quarter came in at 1.5%, down from 2.0% in the first quarter, but slightly better than expected. Meanwhile, historical revisions, which have in the past shown a weaker recovery than initially reported, were fairly benign. We still think that the Fed is lining up for another round of quantitative easing at the September meeting, when the committee will next have an opportunity to downgrade its forecasts and Chairman Bernanke holds a press conference to explain the Fed’s decision. But there was nothing in the GDP report to give the Fed an itchy trigger finger. So we do not expect any announcements at next Wednesday’s (August 1) FOMC meeting. Nevertheless, the language of the statement will (as always) be sifted for clues about the Fed’s intentions. In particular, any changes to the committee’s expectation that “inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate,” to suggest that inflation could deviate more strongly to the downside, would be a significant indication that another round of quantitative easing is coming.

Was July another subpar month for jobs? Probably. We expect that the economy added just 90,000 to payrolls, up only slightly from the 75,000 average of the previous three months. The unemployment rate is expected to stay at 8.2%. Layoffs have slowed, but businesses are increasingly reluctant to hire in the face of Eurozone and US fiscal risks. Unless payrolls surprise us strongly to the upside (including positive revisions to the past few months), the Fed is on track to respond this fall with another round of easing.

Tuesday, July 31 – Employment Cost Index (Second Quarter)

• IHS Global Insight: 0.4%
• Consensus: 0.5%
• Last Actual: 0.4% (First quarter)

What to Look For

• A modest increase in employment costs

Implications

The employment cost index likely rose 0.4% in the second quarter, the same as in the first quarter. This rate is neither too hot to stoke inflation concerns, nor too cold to stoke deflation concerns.

Tuesday, July 31 – Personal Income, Consumption, and Inflation (Jun.)

Personal Consumption, Nominal

• IHS Global Insight: 0.1%
• Consensus: 0.1%
• Last Actual: 0.0% (May)

Personal Consumption, Real

• IHS Global Insight: 0.0%
• Last Actual: 0.1% (May)

Personal Income

• IHS Global Insight: 0.5%
• Consensus: 0.4%
• Last Actual: 0.2% (May)

Core PCE Inflation

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

What to Look For

• A robust gain in person income, resulting only in a slight increase in spending

Implications

Personal incomes likely grew a robust 0.5% in June, as hours worked and hourly earnings improved significantly. Spending, however, is expected to rise only 0.1%, with real spending flat. We also expect 0.2% core PCE price inflation for the month, leaving year-on-year inflation at 1.8%.

Tuesday, July 31 – S&P/Case-Shiller Home Price Index (May)

• IHS Global Insight: -1.1%
• Consensus: -1.5%
• Last Actual: -1.9% (Apr.)

What to Look For

• Advancing home prices

Implications

Year-on-year declines in the S&P/Case Shiller Home Price Index likely narrowed to -1.1% in May, from -1.9% in April. This would incorporate a 0.7% monthly increase in prices, similar to April. Stronger demand and tighter supplies are pushing home prices higher.

Tuesday, July 31 – Conference Board Consumer Confidence (Jul.)

• IHS Global Insight: 64.0
• Consensus: 64.1
• Last Actual: 62.0 (Jun.)

What to Look For

• Small improvement over June reading

Implications

The Conference Board’s Consumer Confidence Index is expected to rise 2 points, to 64.0 in July. The index has fallen every month since February and we are looking for some stabilization at a very low level. Downward-trending jobless claims could help, but further declines in confidence are entirely possible.

Wednesday, August 1 – Construction Spending (Jun.)

Construction Put in Place

• IHS Global Insight: 0.5%
• Consensus: 0.3%
• Last Actual: 0.9% (May)

Construction Excl. Residential Improvements

• IHS Global Insight: 0.6%
• Last Actual: 0.5% (May)

What to Look For

• Increased construction spending

Implications

Construction spending likely increased 0.5% in June. Strong gains in single-family and multifamily construction offset another drop in public construction.

Wednesday, August 1 – ISM Manufacturing Index (Jul.)

• IHS Global Insight: 49.5
• Consensus: 50.4
• Last Actual: 49.7 (Jun.)

What to Look For

• A slightly more contractionary reading.

Implications

The ISM Manufacturing Index is expected to inch lower to 49.5 in July, just shy of the neutral reading of 50. A slight pullback in manufacturing continued last month, and could persist. But we do not expect the index to fall into recession territory.

Wednesday, August 1 – FOMC Press Conference

Effective Federal Funds Rate

• IHS Global Insight: 0.00–0.25%
• Consensus: 0.00–0.25%
• Last Actual: 0.00–0.25%

What to Look For

• No further easing until September, but watch the statement language for clues

Implications

With second-quarter GDP growth coming in as expected and historical revisions generally benign, we do not think the Fed is itching to pull the trigger on another round of easing. So next week’s meeting will be a quiet one and the Fed will wait until September, when it can next downgrade its forecasts.

Wednesday, August 1 – Motor Vehicle Sales (Jul.)

• IHS Global Insight: 14.1 Mil.
• Consensus: 14.0 Mil.
• Last Actual: 14.0 Mil. (Jun.)

What to Look For

• Minor improvement over June

Implications

July’s light-vehicle sales volume will likely be similar to June’s, at 14.1 million units (annual rate). Inventory levels for both passenger cars and light trucks have been creeping upward and incentive programs to move older model-year (2012) vehicles have been prevalent this month.

Friday, August 3 – Employment Report (Jul.)

Nonfarm Payrolls

• IHS Global Insight: 90,000
• Consensus: 100,000
• Last Actual: 80,000 (Jun.)

Unemployment Rate

• IHS Global Insight: 8.2%
• Consensus: 8.2%
• Last Actual: 8.2% (Jun.)

Average Hourly Earnings

• IHS Global Insight: 0.1%
• Consensus: 0.2%
• Last Actual: 0.3% (Jun.)

What to Look For

• Marginally better payrolls compared to previous three months; no improvement in the unemployment rate

Implications

We expect another weak employment report for July. Initial unemployment insurance claims have been very volatile in recent weeks, making it hard to use them as a guide, but there's little evidence of any pickup in the labor market. We are expecting an overall increase in jobs of 90,000 in July, slightly better than the 80,000 in June, because we don't expect job creation in education and health services to be as weak as it surprisingly was in June. We expect the unemployment rate to be unchanged, at 8.2%.

Friday, August 3 – ISM Non-Manufacturing Index (Jul.)

• IHS Global Insight: 52.6
• Consensus: 52.4
• Last Actual: 52.1 (Jun.)

What to Look For

• Stabilization at a lower level

Implications

The ISM Non-Manufacturing Index is expected to have picked up to 52.6 in July after falling to 52.1 in June. While the manufacturing sector contracted this month and last, most non-manufacturing industries continued to expand. However, the rate of growth has slowed from earlier in the year thanks to weaker exports and domestic headwinds, and may not pick up anytime soon.