U.S. economic news for the week ended August 19, 2011

U.S. and global economic news

Global stocks dropped sharply this week amid concern that the U.S. economic recovery is faltering and Europe's debt crisis will worsen. Investors turned cautious after German and French leaders failed to come up with concrete proposals to address sovereign debt problems in the region. A spate of negative U.S. news, reports that European banks lack sufficient capital, and downgrades of the U.S. and global economy by three U.S. banks sent the market careening lower throughout much of the week.

Gold prices, benefitting from safe-haven flows, jumped well about $1800 per ounce, and U.S. Treasuries surged, with the yield on the 10-year note falling below 2% for the first time in 50 years. Canadian and British debt of similar maturities also hit record lows. Amid fears of a slowing global economy, crude prices dropped below $84. This month alone, global equities markets have lost more than $6 trillion of their value.

U.S. and global economic news

Worries mount that Europe's banks lack sufficient capital
Speculation that European banks lack sufficient capital further unnerved investors this week. Worries about the health of the bank system mounted after the European Central Bank announced that a lender will borrow dollars for the first time in six months, and The Wall Street Journal reported that regulators were scrutinizing the U.S. operations of Europe's largest lenders to assess their vulnerability.

Swiss National Bank moves to weaken its currency
The Swiss National Bank (SNB) made yet another effort this week to weaken its currency, the franc (CHF), which has been driven higher as investors seek refuge from the eurozone debt crisis and fiscal worries in the United States. The bank nearly doubled the amount of liquidity available to the money market to CHF200 billion from CHF120 billion, but stopped short of announcing tougher moves, such as adopting a currency target or pegging the currency to the euro. The SNB said it would also continue to repurchase outstanding SNB bills and use foreign-exchange swap transitions. The move was the third effort n the last several weeks to weaken the franc by flooding the market with liquidity.

Fitch confirms U.S. top credit rating
Fitch Ratings confirmed the United States' top-notch credit rating and gave a vote of confidence to Washington's deficit reduction efforts. Fitch also maintained its stable outlook on its U.S. rating. This affirmation comes two weeks after Standard & Poor's downgraded the United States to AA+ with a negative outlook. Fitch did threaten to add a negative outlook to its rating if U.S. lawmakers fail to implement the $2.1 trillion in savings that were agreed to earlier this month or if the economy deteriorates significantly.

German growth slows sharply
News that Germany's economic growth slowed sharply in the second quarter of 2011 roiled markets and called into question the European Central Bank's decision to raise interest rates. The country's gross domestic product rose 0.1% in the second quarter from the first, and by 2.7% in annual terms. The German numbers, together with last week's data that showed flat growth in France, raised concern about the health of core European countries. The German report showed that net exports, private consumption, and construction activity weighed on growth in the second quarter.

U.S. economic news shows more weakness
While U.S. economic data were mixed this week, investors largely focused on the negative. In another sign of a persistently weak U.S. labor market, jobless claims rose more than expected by 9,000 to 408,000, in the week ended August 13. A Philadelphia-area manufacturing report took on added significance amid the economic jitters after it showed that area manufacturing shrank in August by the most since 2009. The U.S. Department of Commerce Department reported that housing starts dropped 1.5% in July. On the flip side, in July, industrial production in the United States climbed 09%, the most in a year, as carmakers began to shake off the effect of the disaster in Japan and as temperatures boosted utility use.

U.S. banks cut global and U.S. growth forecasts
Morgan Stanley cut its forecast for global economic growth this year to 3.9% from 4.2%, citing and insufficient policy response to Europe's debt crisis and weakening confidence. Morgan Stanley also cuts its 2012 GDP growth forecast to 0.5% from a previous estimate of 1.2%. Citigroup, citing "political paralysis" and fiscal tightening steps cut its 2011 U.S. growth forecast to 1.6% from 1.7%, and JPMorgan, noting that the risks of recession are "clearly elevated," said it now expects growth in the fourth quarter of 1%, rather than the 2.5%, previously forecast, and 0.5% in the first quarter of 2012, instead of 1.5%

U.S. consumer and wholesale costs rise more than expected
Consumer and wholesale costs in the United States rose more than expected in July. Consumer prices rose 0.5% from June, and the core rate, which excludes volatile food and energy costs, rose by a monthly 0.2%. On an annualized basis consumer prices were up 3.6% in July, above the U.S. Federal Reserve Board's inflation target. Wholesale prices rose 0.2%, led by higher prices for tobacco, trucks, and pharmaceuticals. The report, released by the U.S. Department of Labor, showed that the cost of crude products dropped in July for the third month in a row, led by declines in prices of food and petroleum. However, it suggests that falling commodity prices have yet to show up in consumer prices. The core measure however, which excludes volatile food and energy, rose 0.4%, the most since January. Compared with July 2010, companies paid 7.2% more for good last month, while core prices climbed 2.5% in the 12-month period.

U.S. and global corporate news

Google buys Motorola Mobility
Google, the largest maker of smart phone software, agreed to buy Motorola Mobility for $12.5 billion in cash. The deal ups Google's rivalry with Apple and gives it more control over wireless patents while expanding its hardware business.

Target and Staples report strong profits
Target, the second-largest discount U.S. retailer reported that it s profit jumped 3.7% in the second-quarter on higher sales. Staples, the biggest office supply retailer, forecast earnings that topped analysts' expectations. The company also reported that its fiscal second-quarter earnings rose 35% as its business units showed progress even as office suppliers struggle overall.

Hewlett-Packard falls short of expectations
Hewlett-Packard forecast fiscal fourth-quarter and full-year earnings that missed analysts' expectations as dull consumer spending failed to offset corporate purchases of printers, computers and servers.