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Economic data is firmly in the spotlight Tuesday following the release on housing starts and producer prices. The fact is that the Fed is concerned about economic growth and pricing pressures, leaving the FOMC in a tough spot. Today’s data did little to help the committee out on what to do with interest rates. Data on same store sales data for the prior week was also released this morning, but did little to help the bulls cause.

For the week ending August 16, same-store sales rose 0.1 percent week on week and 2.4 percent year on year. Year on year results were down from 2.6 percent in the prior week. The Redbook release was equally disappointing, up just 1.3 percent year on year, also down 2-tenths from the prior week. Both reports noted that back to school sales were weak as parents pull back on spending due to a difficult economic environment.

Consumer spending has held up rather well considering the problems seen in the economy. One of the largest problems has been the steep decline in housing activity, which was confirmed once again by the release of the housing starts data for July. Housing starts fell 11.0 percent during the month to an annualized level of 0.965 million units. This was slightly better than expected, but starts are still down 29.6 percent in the past year. Unfortunately, there are few signs that things will get better anytime soon with building permits falling 17.7 percent in July. This component is used a predictor of future housing activity. Though today’s release seems extremely weak, we need to remember that last month’s data showed a 10.4 percent gain due to abnormal conditions because of a change in building code in New York.

The hope of the Fed has been that easing economic activity would lead to a drop in pricing pressures. However, last week’s CPI data and today’s PPI release don’t support this view. Producer prices rose 1.2 percent in July, well above expectations for a gain of 0.5 percent. The core was also much stronger than expected, up 0.7 percent when growth of 0.2 percent was expected. In the past year, the PPI is up 9.8 percent, up from 9.1 percent in June. The core rate is up 3.6 percent year on year, 5-tenths higher than last month. Stocks haven’t fallen as much as one would expect given the news, but this has to do with the fact oil prices have come down from highs seen just six weeks ago.

The October futures contract for crude is down half a dollar Tuesday to a price near $112.50 a barrel. It was in early July that crude prices moved above $147 a barrel and this decline is helping offset concerns about pricing pressures seen in the most recent data on consumer and producer prices. Crude prices are sue to get more attention on Wednesday following the release of the weekly petroleum inventory data.

Thursday is the only day left with significant economic data on tap with jobless claims, leading indicators and the Philly Fed Survey on tap. Thursday will also see the kick off the Kansas City Fed’s annual Economic Policy Symposium in Jackson Hole, Wyoming, which Fed Chairman Bernanke is set to speak at on Friday.

Jody Osborne

Senior Staff Writer & Options Strategist

Optionetics.com ~ Your Options Education Site

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