U.S. economic news for the week ended July 29, 2011

The showdown in Congress over a deal to raise the U.S. government’s borrowing ceiling while cutting annual spending continued unresolved, with all parties digging in their heels. Looming largely is the August 2 deadline, which the U.S. Department of Treasury has designated as the date after which the U.S. government may no longer be able to meet all of its financial obligations. Even if lawmakers can meet the deadline, one of the major credit ratings agencies could downgrade U.S. debt.

A downgrade could affect interest rates, and still-struggling consumers and businesses could be squeezed. Among other possible consequences, hundreds of local governments and housing-finance programs could have their credit ratings downgraded. On Thursday, Moody’s Investors Service placed 177 top-rated municipal bond issuers on review for possible downgrades.

The recent search for safe-haven investments caused stocks to falter and the price of gold to spike. Some $9 billion a day has been withdrawn from money market funds this week, with a two-week outflow of $62 billion, according to Nomura Securities International. Ironically, the financial uncertainty pushed more investors into buying Treasuries, sending prices higher and yields lower. Major currencies rose against the dollar, including the Japanese yen, the Swiss franc, the euro, and the Australian, Canadian, and Singapore dollars.

Other economic reports were mixed. Although second-quarter U.S. economic growth was low, U.S. jobless claims fell below 400,000 for the week ended July 23, and home sales contracts rose in June. However, May home prices were flat, and U.S. consumer confidence reports offered conflicting indications, while consumer confidence fell in the eurozone and the United Kingdom.

Global economic news

U.S. economy barely expands in second quarter
The U.S. economy grew anemically in the second quarter. Gross domestic product grew at an annualized, seasonally adjusted pace of 1.3%, the U.S. Department of Commerce reported. The rate of growth in the first quarter was revised downward, to 0.4% from the earlier estimate of 1.9%. Economists had expected the GDP to rise 1.8% in the second quarter. Consumer spending rose at an annualized 0.1% rate, its weakest level in two years.

Spain on review for debt downgrade
Moody's Investors Service placed Spain's "Aa2" credit rating on review for a possible downgrade. The yield on Spain's 10-year government bond rose 1.7 percentage points to 6.136%, widening the spread between Spanish sovereign debt and similar German debt to 354.2 basis points. This underscores the financial strain the second Greek bailout package is having on other financially weak European countries.

U.S. jobless claims fall to 398,000
Initial jobless claims fell by 34,000 to 398,000 for the week ended July 23, below the 400,000 level, which generally indicates an economy with overall job growth. The four-week average fell by 8,500 to 413,750.

Chicago Purchasing Managers’ Index falls
The Chicago Purchasing Managers’ Index decreased to 58.8 in July, from 61.1 in June, according to the Institute for Supply Management. A reading of 60.2 had been expected. Readings above 50 indicate an expanding business sector.

U.S. home sale contracts rise in June
The number of contracts to buy previously owned U.S. homes surprisingly rose in June, as buyers were attracted to lower house prices and lower borrowing costs. The 2.4% rise in pending home sales followed a gain of 8.2% in May. Because of high cancellation rates, however, its difficult to gauge whether this will lead to higher home sales.

May home prices flat
U.S. home prices rose in May from April but remained below year-earlier levels. The Case-Shiller index of 10 major metropolitan areas rose 1.1% and the 20-city index was 1% higher in May than a month earlier. Year to year, prices for the two indexes were down 3.6% and 4.5%, respectively.

Durable-goods orders drop
Durable-goods orders fell by 2.1% in June, the second decline in three months, pointing to ongoing economic sluggishness, according to the U.S. Commerce Department.

Consumer confidence gets mixed reading
U.S. consumer confidence rose in July, according to the Conference Board. Its monthly index of consumer confidence rose to 59.5 from 57.6 in June. However, the Bloomberg Consumer Comfort Index fell to -46.8 in the week ended July 24, from a reading of -43.3 the previous week. The Reuters/University of Michigan’s consumer sentiment index fell to 63.7 in July from 71.5 in June.

Eurozone confidence dips
Businesses and consumers in the eurozone grew less confident about their prospects in July, according to the Economic Sentiment Index, the European Commission’s monthly survey of economic confidence. The measure dropped to 103.2 from 105.4 in June. It was the ESI’s fifth-straight monthly decline.

U.K. consumer confidence falls
Consumer confidence in the U.K., already sagging, fell further in July. A sentiment index fell to -30, its lowest point since April, from -25 in June and -22 a year earlier. All components of the index fell. The U.K. economy grew a meager 0.2% in the second quarter after being flat for the previous half year.

India fights inflation with higher interest rates
The Reserve Bank of India, the country’s central bank, raised interest rates by 0.5 percentage points to 8.0%, its eleventh increase since March 2010. Indian inflation reached 9.44% in June.

German inflation creeps higher
Consumer prices rose 0.4% in Germany in July, and 2.4% from a year earlier. Because Germany is dependent on the European Central Bank (ECB) for monetary policy and the ECB must also watch out for weak European economies, Germany may have to accept rising inflation for now.

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Global corporate news

UPS delivers higher profits
Global shipping firm United Parcel Service posted a 26% growth in second-quarter profit on strength in China and Europe. UPS said it expects robust profit growth on international routes in the coming months.

European carmakers outpace American rivals
German auto maker Daimler and France’s PSA Peugeot-Citroen both announced healthy profit increases this week, while Ford’s profit fell and Chrysler posted a loss for the second quarter. Peugeot reported a 19% rise in profit for the first half of 2011 despite the impact of the Japanese earthquake and tsunami and the production interruption that created. Daimler had a 29% rise in second-quarter net profit on thriving demand for new trucks and luxury cars in many major global markets. Ford’s profit was trimmed by spending on new-model development and higher prices for commodities. Chrysler’s loss was due to a $551 million one-time charge to repay loans to the United States and Canadian governments.

Higher prices boost oil giants’ profits
Royal Dutch Shell, British Petroleum, and Exxon all benefited from higher oil prices in the quarter ending June 30. BP bounced back from a $17-billion loss a year ago, stemming from a $32-billion charge to cover costs of the Gulf of Mexico oil spill, to a second-quarter net profit of $5.62 billion this year. Total revenue rose 39% in the quarter. Shell’s profits rose to $8.7 billion from $4.4 billion a year ago. Exxon’s net income was $10.7 billion, up from $7.6 billion a year ago.

RIM, Nokia and Nintendo show impact of losses to Apple
Research in Motion, Nokia, and Nintendo continue to struggle in the face of very tough competition from Apple and Google in the smart phone space. Research in Motion announced a plan to cut 2,000 jobs, 11% of its workforce, as the BlackBerry maker struggles with shrinking market share of North American smart phone sales. Nokia’s debt was downgraded two notches, to "Baa2" from "A3," by Moody’s Investor Service, reflecting the sharp deterioration of Nokia’s market position. Apple and Samsung Electronics overtook Nokia for the top two positions in the global smartphone market in the second quarter, according to market research firm Strategy Analytics. Nintendo cut its profit forecast for the year ending next March by more than 80% as its 3DS hand-held player has been hurt by gamers’ appetite for games that can be played online or on smart phones, including Apple’s iPhone.

Dunkin’ Donuts serves up IPO, coffee competition to heat up
The hunger for initial public offerings continued this week, with 11 IPOs, including an offering from Dunkin’ Donuts that raised $423 million, and will promote the franchiser’s growth.