The tide turns? Hurricane Gustav did little damage to the oil rigs in the Gulf of Mexico and the price of a barrel of crude fell below $110. Meanwhile, slowing economic growth at home and abroad is slowing demand for energy and other commodities. In fact, the commodity index that was 30 percent higher in June than one year earlier was less than 1 percent higher in late August.

That last number suggests that the rise in non-labor costs has slowed. The rise in labor cost hasn't slowed that much, to the surprise of some. Furthermore, the inflation story of the past few years has been one of business absorbing some of the cost increases, thereby keeping retail inflation down. The underlying story has been the slow loss of this ability to absorb cost increases. This is partly a productivity story. Productivity gains can offset some cost increases. But one of the things to follow over the next two or three quarters is how much productivity could be slowing, exposing business to more of the cost increases. Either margins will be further squeezed or retail prices have to go up. The bottom line is that even with lower energy and some other commodity prices, the inflation threat is not going away, in fact, it could be heating up.

But the tide definitely turned late in the week. It now appears that Hurricane Ike is headed into the same oil rigs that Gustav sidestepped. And the aerospace industry suffered the start of what could be a long strike. The problem with these developments is that this economy is so weak. It has little capacity to withstand shocks like a major hurricane or a long strike. The labor report late last week reflected the degree of weakness, as the unemployment rate climbed to 6.1 percent and could be heading higher even without major shocks. As expected, jobs fell for the eighth straight month. But even this softening in the labor market did little to soften wage growth.

The lone bright spot of the week was the long anticipated government takeover of Fannie Mae and Freddie Mac. Given how weak the housing market has been, and for how long, banks have been reluctant to make new mortgages. Fannie and Freddie hold almost half of the current $10 trillion in outstanding mortgages and by some measures, are behind nearly three out of four new mortgages. Bringing these mortgage giants under the wing of the Treasury Department has the potential to be the first step in freeing up mortgage money for new home buyers. And as such, there is the chance it could begin to unfreeze the credit markets. There has not been much positive news of late on the domestic or international economy. A more normal function in the mortgage and credit markets could be the start of the road back.

Thursday, September 11

8:30am U.S. International Trade in Goods and Services, July 2008 (Bureau of the Census)

Trade has been the one bright spot in the economy. But now the dollar has rebounded and economic growth abroad has slowed (the Leading Economic Indexes for the U.K., Germany, Korea, and Japan have all declined even more than for the U.S. in the latest month). Imports are unlikely to decline and could even begin to turn around. But export growth clearly is not going to remain in the double digits. The bottom line is that while consumption and investment growth remain weak, there is likely to be less help from trade going forward. Therefore, GDP growth is very unlikely to be as strong in the second half of this year as in the first.

Friday, September 12

8:30am Producer Price Indexes (Bureau of Labor Statistics)

Material cost increases have kept the monthly rise in the "core" PPI (which excludes food & energy) in the 0.3-to-0.4 percent range. That probably continued in August, and will continue into the autumn months.

8:30am Advance Retail Sales (Bureau of the Census)

Consumer confidence is very weak. And income, adjusted for inflation, outright declined. Retail Sales, excluding autos, probably declined by 0.2-to-0.3 percent in August, even when not adjusted for inflation. Sales could remain flat to declining right through the holiday season.

BY THE END OF THE WEEK

The Leading Economic Indicators show softening economic growth across the globe. The good news is the drop in energy and some commodity prices. But the continued turmoil in financial markets, especially constrained credit markets, is taking its toll. The euro zone GDP fell by 0.2 percent in the second quarter, after rising by 0.7 percent in the first quarter. With the Leading Economic Index for the U.K. and Germany falling by more than 1 percent in the latest reading, the fear is that GDP growth could be down again in the third quarter.

Conditions in East Asia are only a little better. The Leading Economic Index for Korea and Japan are no more positive than for the U.K. or Germany. Economic growth is slowing in India. And there is concern about the Chinese economy post-Olympics. Indonesia and Malaysia are fairing better. So the news is not uniformly down. But economies in North America, Europe, and East Asia are all showing the strain of past price hikes and current financial uncertainty. The bottom line is that the news overall isn't likely to be picking up this autumn or perhaps even this winter.