Introduction

Benefits from this year's dip in the dollar and rise in oil have yet to give a lift to the factory sector or to inflation, both of which are edging lower. But the good news is that both may begin to turn higher sooner than later. The bad news, however, is that there are no hints yet of anything better to come for the economy's central source of wealth, the consumer.

Shop, don't stop!

The upward slope for retail sales has clearly been flattening out since mid-year last year and is now beginning to actually turn down. The adjusted total for the month of March was $447 billion, down 0.6 percent from the recovery peak of $450 billion set in December. But much of the flattening over this period has been due to depressed dollar sales at gasoline stations due, not to weak demand, but to low prices. Looking at retail sales excluding gasoline stations offers a core reading on consumer spending. Here, flattening is less severe but still apparent. The monthly ex-gas total at $416 billion is down 0.4 percent from the recovery high for this reading which was just set in February. The accompanying graph breaks the monthly series into year-on-year percentage change which has slowed noticeably over the last year, from roughly 6 percent growth to roughly 4 percent growth.

Vehicle sales have gone into reverse this year, falling in January and then plunging in March. Year-on-year growth had been holding in the mid-to-high single digits before coming in at 1.5 percent during March for the worst showing in 6-1/2 years as shown in the dark line of the graph. The light line tracks restaurant sales which also moved lower in March but are still holding near the 6 percent line. Still, the trend for restaurants has been on a steady slide from the high single digits of early 2015. And there also may be a special factor at play during March. Restaurants are a popular destination for Easter and the holiday's shift to early April no doubt pulled sales out of March. This effect is adjusted for but, in special cases like this, there is always the risk of over adjustment making it possible that we'll see an oversized revision, perhaps to the upside, in next month's report. For you American retail buffs, sales of motor vehicles & parts, at an adjusted $92 billion, made up 21 percent of total retail sales in March while restaurant sales, at $54 billion in March, were at 12 percent.

This year's decline for vehicle sales, and its spillover effect into production, will be a major factor behind what is expected to be a very soft first-quarter for the economy where the outlook for GDP is just about flat. Sales weakness does follow last year's very strong results for vehicles and perhaps to a degree indicates that replacement demand has been satiated. But also to a degree the decline likely reflects lack of confidence in income and employment prospects. The University of Michigan's consumer sentiment index, like similar readings, has been holding mostly steady at still healthy levels that, however, are noticeably below last year's levels. Sentiment for the first two weeks of April came in at a lower-than-expected 89.7 vs 91.0 for final March. Weakness is centered in the expectations component, exactly the component that is most sensitive to changes in income prospects. Will vehicle sales begin to pop up and help the economy during the second quarter? Initial hints may very likely come from confidence readings.

So what if oil is higher

The ongoing rise for oil and with it, the ongoing rise in pump prices, have yet to turn up any heat at all for most inflation readings. Gas hit a low near $1.75 per gallon in February and has risen steadily since, to just over $2.10 for AAA's latest reading. But this lift isn't yet impressing anybody, based at least on inflation expectations. Consumer expectations for inflation one-year out are holding at a very modest 2.7 percent in the consumer sentiment data and are actually moving lower for the Atlanta Fed's business expectations, down 1 tenth to a very modest 1.7 percent. These readings, that also include a 2 tenths dip in consumer 5-year expectations to 2.5 percent, justify Janet Yellen's skepticism that inflation, held down by weak wage growth, will show much if any traction this year.

The week also saw release of the producer and consumer price reports, both showing weakness in March tied to services where prices, after a disappointingly flat February, fell in the March producer price report as tracked in the red line of the graph. The 0.2 percent decline is the first negative reading since October last year. Weakness here points to the effects of excess capacity together with soft demand, including the continuing deflationary pull from the global economy. But coming to the rescue, perhaps, are goods prices which, tracked in the graph's column, posted a monthly advance for the first time since July last year, one tied to rising oil prices and related costs for raw materials. Consumer prices fared little better, at no more than fractional gains for most readings. Shelter prices are slowing as are food prices. And here, too, broad price levels showed no lift, at least yet, from gains in energy prices.

The core rate for consumer inflation, in fact, is moving in the wrong direction, down 1 tenth in March to a year-on-year 2.2 percent as seen in the purple line of the graph. The red line is the big line, that is the PCE core which is the Fed's specific target for its 2 percent goal. Following the softness of both the producer and consumer reports, where many components are inputs into the PCE, early expectations are looking for a big reversal, specifically a 2 tenths decline to a 1.5 percent rate. This would definitely turn down whatever heat there may be for the Fed's next rate hike, perhaps even scotching any expectations for a June hike. Oil prices may be on the move higher but their immediate impact on the price picture is minimal at the very most. Note that the PCE core will be released at month end with personal income & spending data for March, a report that in February proved to be the biggest disappointment on the calendar.

Waiting for the good news

A big disappointment in the latest week was industrial production, falling a very sizable 0.6 percent for a second straight month. And the manufacturing component, pulled down by a 1.6 percent decline in vehicle production, fell 0.3 percent following a 0.1 percent decline in February. The weakness in vehicle production, which is no surprise of course given the declines underway in vehicle sales, is not a positive development for the factory sector which, given weakness in exports and both energy equipment and capital goods, has relied on vehicles for whatever growth the sector has managed. The red line of the graph is the report's vehicle subcomponent which has climbed steadily higher the last five years. The gray line is manufacturing production excluding vehicles which, as you can see, has been dead flat at the 100 line and showing no significant improvement at all over the course of the graph. If vehicle production fails to turn back up, it could push the gray line below the 100 line. The industrial production report also included two more thuds, another decline for utility output and, more importantly, another very steep decline for mining which, showing no lift yet from the gain in oil prices, has now been in contraction for seven straight months.

But there are hopes that the worst may be over for manufacturing, specifically a lift for exports as the dollar turns lower and a lift for energy and mining equipment as oil and commodity prices turn higher. Early signs of improvement have been popping up the last couple months in regional manufacturing surveys including the Empire State report which is beginning to show real life. The index for April rose sharply to a higher-than-expected 9.56 level that is in solid expansion ground. New orders are even a bit stronger at 11.14 for a second straight gain while unfilled orders are showing their best improvement since July. Shipments are up, employment is up, and prices paid are up, the latter reflecting higher petroleum prices. What's really convincing is that all the key readings in the report have moved into solid ground. This report, compiled by the New York Fed, offers a promise of things to come.

Markets: Too big to bail

There are worries of course that the nation's money-center banks continue to mushroom, that their relative size is even larger, perhaps far larger, than it was in 2008 when the government had to save the universe and bail out the group. Stress tests lead the week's news, news that really isn't very comforting as five of the biggest -- Bank of America, Wells Fargo, JPMorgan Chase, State Street, Bank of New York Mellon -- all failed to pass the mark. The news may have had no effect on trading but is a reminder that the financial system may be no less vulnerable than it was to a counter-party crisis or to a liquidity event, perhaps one sparked, like Lehman Brothers in 2008 or the Flash Crash in 2010, by small firms at the center of the action.

Markets were constructive in the week as demand for risk builds, demand boosted by no chance of an immediate Federal Reserve rate hike. The Dow was little changed on the day but ended the week with a 1.8 percent gain. Oil had another good week, holding above $40 for a weekly gain of more than 5 percent and a year-to-date gain of more than 11 percent. Gains in oil should support price gains across the industrial group, at a time when sources of price traction are hard to find. The dollar index did rise 0.5 percent on the week but, at 94.72, is down 4.2 percent so far on the year.

The bottom line

It's wait-and-see time for the economy, waiting for the stimulative effects of this year's dollar depreciation on exports and its inflationary boost to imports. The rise in oil prices offers its own promises, of perhaps new gains for energy extraction and energy equipment. These effects are poised to take hold just at a time when many indicators are digging out fresh lows. Yet missing are any hints of future strength for the consumer sector, the result not of low employment but of stubbornly weak wage growth.

Week of April 18 to April 22

Housing is the week's theme and the outlook is good. Home builders have been upbeat and a gain for Monday's housing market index is expected. A dip is the call for housing starts on Tuesday but not housing permits where a solid gain is expected. Solid gains are also expected for FHFA house price data on Thursday, gains that would underscore the importance of price appreciation in a low inflation economy. Initial jobless claims will also be posted on Thursday and the weekly data will match the sample week for the monthly employment report. Though a rise in claims is expected, it would be a rise from a very low level. The Philly Fed follows on Thursday and is expected to confirm the convincing strength seen in Empire State, a report where readings may have gotten a lift from the dollar's decline and oil's gain.

Monday

Housing Market Index for April

Consensus Forecast: 59

Consensus Range: 58 to 60

A gain is expected for the housing market index which has been solid but not accelerating. Though both strong, current sales and future sales are being held back by limited construction capacity, including shortages in labor.

Tuesday

Housing Starts for March

Consensus Forecast: 1.167 million

Consensus Range: 1.120 to 1.195 million

Housing Permits for March

Consensus Forecast: 1.200 million

Consensus Range: 1.175 to 1.231 million

Housing starts & permits have swung sharply in recent reports including a big upswing for starts in February together with a big downswing for permits. Forecasters are calling for a reversal in March, a 0.9 percent dip for starts to a 1.167 million annualized pace and a 2.8 percent gain for permits to a 1.200 million rate. A gain for permits, especially one centered in single-family homes, could lift the outlook for what has been an underperforming housing sector.

Wednesday

Existing Home Sales for March

Consensus Forecast, annualized rate: 5.268 million

Consensus Range: 5.190 to 5.400 million

A 3.7 percent March surge is expected for existing home sales which however plunged 7.1 percent in a February drop that the usually upbeat National Association of Realtors underscored as meaningful. The strength of the jobs market has yet to be reflected in home sales, the result in part of low wage growth. Low supply and only marginal price appreciation have long been negatives in this report.

Thursday

Initial Jobless Claims for April 16 week

Consensus Forecast: 265,000

Consensus Range: 261,000 to 280,000

Initial jobless claims may be hard to read for the April 16 week, an important week that is the sample week for the April employment report. A large 12,000 gain to 265,000 is expected but it comes from a very low 253,000 in the prior week. The 4-week average will perhaps be the most important reading and looks, based on the consensus, to be unchanged also at 265,000, a level that would only be slightly above the sample week of the March employment report. Low levels of unemployment claims point to healthy demand for labor.

Philadelphia Fed Manufacturing Index for April

Consensus Forecast: 9.0

Consensus Range: 5.0 to 15.0

At an expected 9.0, the Philadelphia Fed manufacturing index is expected to extend March's move into positive territory. A solid report would confirm April strength in the Empire State report and raise the possibility that the factory sector is beginning to get a lift from the lower dollar and from higher oil prices. New orders and shipments showed a sudden burst of life in the March report.

FHFA House Price Index for February

Consensus Forecast: +0.4%

Consensus Range: +0.2% to +0.6%

FHFA house price index rose a solid 0.5 percent in January and a 0.4 percent rise is expected for February's report. The year-on-year rate has been holding at or near the 6.0 percent line over the last year, not spectacular but still solid for a low inflation economy.

Index of Leading Economic Indicators for March

Consensus Forecast: +0.5%

Consensus Range: +0.1% to +0.5%

The index of leading indicators is expected to jump 0.5 percent in March following very weak showings over the prior three months. Declines in initial jobless claims and a big gain for the ISM new orders index are expected to lead the positives.

Friday

Manufacturing PMI, April Flash

Consensus Forecast: 52.0

Consensus Range: 51.5 to 52.0

Anecdotal reports on the manufacturing sector have been coming alive over the last month and a gain is the call for the flash manufacturing PMI, to 52.0 from a soft 51.4 in March. This report covers exports which showed improvement in March.