August 31, 2007 / 12:33 PM / 12 years ago

Inflation in check in July but August outlook weaker

WASHINGTON (Reuters) - Inflation was under control in July and U.S. factories were busier than forecast, according to economic data released on Friday, but other reports showed U.S. consumer sentiment worsened in August and the outlook for economic growth weakened.

Customers shop for produce at the Food Project's Farmer's Market in the Boston neighborhood of Dorchester, Massachusetts, August 14, 2007. Core U.S. consumer prices rose by a less-than-expected 0.1 percent in July, showing stable prices that held the year-on-year rate of nonfood, nonenergy inflation to 1.9 percent for the second month in a row, the Commerce Department said on Friday. REUTERS/Brian Snyder

Markets and analysts, however, mostly shrugged off the data, focusing instead on a speech by Federal Reserve chief Ben Bernanke and on President George W. Bush’s announcement of proposals to help bail out some troubled subprime borrowers so they can keep their homes.

Bernanke said the Fed will take the necessary steps to shelter the economy from turmoil in financial markets but will not bail out investors who made mistakes.

“The committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets,” Bernanke said in a speech to a symposium in Jackson Hole, Wyoming, organized by the Kansas City Federal Reserve.

Bush said the Federal Housing Administration would launch a new initiative to make it easier to allow homeowners who can no longer afford mortgage payments that have reset higher to refinance their loans. The change would allow more borrowers with good payment histories to switch into FHA-insured loans.

Bush also pledged to redouble efforts to persuade Congress to approve FHA reform, which could make the program once again relevant in high-priced coastal housing markets, where many buyers turned to adjustable-rate and non-traditional mortgages.

Wall Street stocks climbed on the Bush plan and on Bernanke’s remarks, which many investors viewed as a tilt toward a possible interest rate cut in September. U.S. Treasury debt prices fell as they lost some of their safe-haven bid.

JULY DATA GOOD, AUGUST WORRISOME

Core U.S. consumer prices edged up less than expected in July while income and spending rose smartly and factory orders far exceeded forecasts, according to government reports.

A core inflation index from the Commerce Department rose 0.1 percent in July, holding the year-on-year increase in the Federal Reserve’s favorite inflation gauge to 1.9 percent for the second straight month.

Analysts polled by Reuters were expecting the core PCE price index, which excludes often-volatile food and fuel costs, to gain 0.2 percent. The June rise was revised to 0.2 percent, from an originally reported 0.1 percent.

“It doesn’t seem like pricing pressures are moving out of control,” said George Davis, chief technical strategist at RBC Capital Markets in Toronto.

Although analysts said the benign inflation data provides some latitude for the Fed to cut the federal funds rate to forestall a credit crunch, the other data suggested that the economy may not need such stimulus.

“Ben Bernanke continues to emphasize that, away from housing, the economy continues to expand at a moderate pace,” said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.

On a more worrisome note, a Reuters/University of Michigan survey of consumer sentiment index fell to the lowest level in 12 months as households grew uncertain about economic prospects due to high food and fuel prices and recent financial market turmoil.

Another gauge of future U.S. economic growth fell to a 27-week low in the most recent week due to higher jobless claims, lower commodity prices and softer housing activity, according to The Economic Cycle Research Institute, an independent analysis firm.

PERSONAL INCOME RISES

The Commerce Department said personal income rose a bigger-than-expected 0.5 percent in July, the largest month-on-month gain since a 0.8 percent rise in March.

Personal spending rose 0.4 percent in July after an upwardly adjusted 0.2 percent increase for June. Analysts polled by Reuters were expecting both personal income and personal spending to rise 0.3 percent.

July’s 1.9 percent rise in the core PCE index was the lowest reading since a 1.9 percent rise in March 2004 and was within the Fed’s normal comfort range of between 1 and 2 percent.

FACTORY ORDERS JUMP

New orders at U.S. factories jumped by a much bigger-than-expected 3.7 percent in July and a strong 2.4 percent without the volatile transportation component, the Commerce Department said.

Analysts polled by Reuters expected orders to rise 0.8 percent in July after an upwardly revised 1.0 percent gain in June, originally reported as a 0.6 percent rise.

July non-defense capital goods orders excluding aircraft, viewed as a good proxy for business spending, rose 1.7 percent, slightly less than the 2.2 percent July gain reported on August 24, the Commerce Department said.

Transportation equipment orders, a volatile category whose monthly performance is heavily influenced by commercial aircraft orders, rose 11.0 percent.

Excluding transportation, orders rose 2.4 percent in July after a revised 0.4 percent fall in June. Boosting the figure was an 8.2 percent increase in orders for primary metals, the largest since July 2004, a 7.0 percent increase in orders for computers and electronic components and a 5.6 percent increase in orders for machinery.

Additional reporting by Gertrude Chavez-Dreyfuss in New York

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