US Economy Real Sector Preview of the Week Ahead

Estimates for Q1 US GDP appear to be creeping higher.

Wholesale inventories were released before the weekend the 0.6% increase was twice the consensus and the Jan series was revised to 0.1% from -0.2%. This inventory accumulation seems wholly desirable and is a response to increased demand. Wholesale sales rose 0.8% in Feb.

Business inventories will released Wed and the consensus calls for a 0.4% increase in Feb, which would be the largest since Nov. Assuming a modest rise in March and Q1 10 would see the strongest increase in business inventories since Q3 08, which was largely a unwanted build up as demand all but evaporated. Back of the envelop calculations suggest that inventories could be a slightly positive for Q1 GDP, say around 0.5%.

The Feb trade balance, out Tuesday, may deteriorate, given the higher price oil and the growth differentials. The contribution to GDP of the next export function may have seen its better days.

Retail sales are likely show another healthy rise. We already know chain store and auto sales were better than expected. The consensus calls for a little more than a 1% gain. More people are working and the work week is slightly longer and the average hourly earnings are a little higher. This in addition to the transfer payment, which also appear to be continuing to support consumption on the margins. We also note that some consumption may be being financed by a decline in some measures of US household savings. Excluding auto and gasoline, Q1 retail sales look to have risen about 2%. If confirmed, it would be the strongest quarterly advance since 2006.

On Thursday, the US reports industrial production and capacity utilization figures. The consensus calls for a 0.7%-0.8% increase. This is likely picking up the inventory re-stocking in some industries. Also we note the big gaps between factory and durable goods orders data and shipments data. These gaps bode well for continued increase in industrial production. Capacity utilization is expected to have risen to 73.3%. This would be the highest since Nov 2008, but still well below the pre-crisis level of 80.7% in Q2 07.

The real sector data for the week finishes with housing starts data. The weak Feb (-5.9%) is likely to be recouped in March with a consensus forecast for about a little more than a 6% increase. If close to the money, Q1 housing starts will have been the best since Q4 08. The average monthly rate of 604k compares with 559k in Q4 09. Residential investment may add to Q1 10 GDP.

While we acknowledge that Greece's fiscal woes benefitted the US dollar, and we are not convinced that this issue has seen sufficient closure yet, we see the emerging growth differentials as another factor supporting the dollar.