By William Patalon III
Executive Editor
Money Morning/The Money Map Report

U.S. Federal Reserve Chairman Ben S. Bernanke and his fellow central bank policymakers will be back in the spotlight this week as the group convenes for its monthly monetary-policy meeting.

But there won’t be much to report.

Although the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) meets Tuesday, the group doesn’t have much room to maneuver: If the Fed cuts rates to stimulate growth, already troublesome inflation could escalate out of control. But if the FOMC raises rates to reign in inflation, the entire economy could drop into a deep-and-lingering recession.

To be sure, Fed policymakers are sure to engage in some spirited debate: The debates will include such topics as pricing pressures vs. slow growth and strong energy prices vs. the weak housing market. There will even be talk about extending the emergency-borrowing program, or about expanding oversight over financial-services firms.

But if Federal Reserve policymakers do much of anything more than just debate the issue – and try and take some kind of action, using interest rates as their weapon of choice – there’s almost certain to be a negative impact on the U.S. economy.

The data coming out this week will focus on the consumer as personal income/spending and consumer credit reveal just how active folks have been during these uncertain times.  As the summer (of discontent) winds down, travelers may be able to get in a last minute trip or two as gas prices have declined over the past few weeks.  And retailers are hoping to benefit from the “back to school” shopping crowd. And second-quarter earnings reports continue as consumer giant, The Procter & Gamble Co. (PG), and insurer American Insurance Group Inc. (AIG) headline the reporting companies.

The final question: Will there be any new surprises as the season comes to a close?  

Market Matters

As earnings season plugs along, just as many questions and concerns about the strength of Corporate America remain unanswered as when Alcoa Inc. (AA) was first on the clock a few weeks back.

At mid-week last week, just over half of the Standard & Poor’s 500 Index companies had reported and the results actually looked halfway decent (relatively speaking, that is).  About two-thirds of those companies announced earnings that exceeded expectations, while only 20% or so missed on analysts’ targets. 

Financials dominated the “good” news companies, as four of the five leading banks bested Street estimates (though, that often meant lower losses instead of better profits).  However, when the dust finally settles, the second quarter will represent the fourth-straight period of declining earnings as S&P companies are headed for a double-digit drop from last year.

Of course, the massive plunge among financials greatly contributed to the negative results.  Looking forward, the eternal optimists remain confident that positive earnings will return for the second half of the year. These optimists even believe that the financials may lead the way as commercial banks and investment banks finally move beyond the period of “never-ending” write-downs.  However, if such optimism does not come to fruition and annual earnings decline for the second full year in a row, Corporate America will have accomplished something not experienced in quite a while – not even during the bear market (and recession) of the early 2000s. 

So, let’s review last week’s numbers.  Energy companies benefited from the surge in oil and gas prices as Exxon-Mobil Corp. (XOM) posted the best quarter ever by a domestic company (though it still managed to fall short of Street expectations). Royal Dutch Shell PLC (RDS.A, RDS.B) and Chevron Corp. (CVX) reaped some strong results as well [For a related story on Exxon and Shell, please click here. For Money Morning‘s recent “Buy, Sell or Hold” feature on Chevron, please click here].

United States Steel Corp. (S) took advantage of the rise in commodity prices, while Verizon Communications Inc. (VZ) and Motorola Inc. (MOT) both recognized better-than-expected profits.  On the downside, General Motors Corp. (GM) experienced its third-worst quarter ever. Tyson Foods Inc. (TSN) struggled as increased grain prices hindered chicken sales.  Sony Corp. (ADR: SNE) was victimized by a decline in consumer spending.  And one-time telecom-sector darling Alcatel-Lucent (ADR: ALU) reported another terrible quarter and said goodbye to both its chairman and its chief executive officers at the same time.

Shifting to the financial world (where there’s no rest for the weary), Merrill Lynch & Co. Inc. (MER) plans to write-down another $5.7 billion as it sells off much of its underwater mortgage portfolio and looks to raise another $8.5 billion through a common stock issuance.  (Some analysts believe Citigroup Inc. (C) has another $8 billion in write-downs in it, as well).  First National Bank of Nevada and First Heritage Bank joined IndyMac Bancorp Inc. (OTC: IDMC) as they were taken over by the Federal Deposit Insurance Corp. (FDIC).

Volatility emerged in the energy market as oil prices fell to their lowest level in two months and even declined in July by almost $16 a barrel from previous record highs.  A late-week rally pushed prices higher, though the general trend may have shifted.  Some untimely comments from the Organization of the Petroleum Exporting Countries (OPEC), and turmoil in Nigeria (not to mention Iran) threaten to shift that newly upbeat mood back into a negative one.

Gasoline fell below $3.90 a gallon after hitting a high of $4.11 at mid-month.  Stocks experienced quite a bit of volatility as daily triple-digit price movements (up or down) seem to have become the norm.  Weaker economic data (see below) helped end last week on a sour note, while bonds benefited from a flight-to-quality that sent the yield on the 10-year below 4% again.  All in all, another ho-hum summer week (if +/- 200 daily price moves can be considered ho-hum).                                     

Economically Speaking

Economists got their first look at the overall growth numbers for the second quarter as Gross Domestic Product (GDP) climbed by 1.9% during the three-month period.  While the data seemed to put the economy safely out of recessionary territory (for now), analysts actually had been hoping for a 2.4% growth rate on the heels of the tax rebates that arrived in May.  The eternal pessimists remain fearful that subsequent quarters will prove far weaker without any additional economic stimulus plans.

Consumer confidence rebounded (ever so slightly) from a 16-year low as declining energy prices eased the prior inflationary fears.  Activity within manufacturing was reported right at the “boom/bust line” of 50 as the Institute for Supply Management ISM Index indicated neither expansion nor contraction during July.  Construction spending fell again (the 11th month of declines in the past 13), proving that the country will not be experiencing a housing rebound anytime soon.   

All eyes were on the labor picture as economists hoped that the domestic layoffs were starting to subside and college grads would be joining the summer work force just in time to stimulate growth.  Early in the week, the Automated Data Processing (ADP)/ADP Survey indicated that private sector employment was on the rise and 9,000 new jobs actually had been added to the economy.  Unfortunately, the euphoria was short-lived; on Friday, the unemployment rate was reported at 5.7%, its highest level in four years.  Meanwhile, 51,000 jobs were lost from the labor force, the seventh-straight month of a shirking non-farm payroll picture.  While the July cuts were slightly below expectations, analysts could not help but focus on the fact that more than 460,000 jobs have been eliminated so far this year. 

Weekly Economic Calendar

News and Related Story Links:

• Money Morning News Analysis:

  Exxon Mobil and Shell Post Record Income but Demand and Production Weigh on Shares.

• Money Morning Special Investing Feature:

  Buy, Sell or Hold: Chevron Corp.

• The Financial Times:

  Alcatel-Lucent chiefs to step down.

• Money Morning Economic Analysis:
  2Q GDP Buoyed by Exports and Rebate Checks.