Positive economic news sent municipals 1/4 point higher in light trading Friday but those levels will be quickly tested this week by $3.26 billion in new supply and several more economic indicators.

Friday, the producer price index for finished goods declined 0.3% in June on a broad-based decline in commodities, confirming the market's hopes for a positive inflation picture.

Adding confidence to speculation that the economic recovery will be sluggish, retail sales in June declined 0.2% to a seasonally adjusted $151.9 billion, as sales for most types of businesses fell, except auto dealers' sales, which rose 1.1%.

"The data suggests that consumer spending is not as robust as we had thought and is consistent with the forecast for a very slow economic recovery," acknowledged James L. Kochan, head of fixed-income research at Robert W. Baird & Co. "The market has had a good tone, but this week will be a test of the higher levels. You might see prices back off some to get deals done."

The market was devoid of new issuance Friday, and secondary trading was light in the morning and then fizzled out early in the afternoon.

The Treasury market began to fall off the highs during the last hour of trading. Inactivity held municipal gains, traders said.

The September municipal futures contract settled up 7/32 to 91.23 with the September MOB spread calculated at negative 67.

In secondary dollar bond trading, Florida State Board of Education 7 1/4S of 2023 were quoted up 1/8 point to 102 1/2-lock to yield 6.93% to the 2004 par call.

New Jersey Turnpike Authority bonds were up 3/8 on the day to 103-1/4 to yield 6.98% to the par call in 1999. The bonds still hold almost a one point lead on other names because of the announced refunding of all Turnpike Authority debt. Traders noted that the bond has made gains on thin trading, and that the market is nervous because of confusion over the terms of the refunding.

Triborough Bridge and Tunnel Authority 7s of 2020 were unchanged at 98 1/8-1/4 to yield to 7.14%, while South Carolina Public Service Authority 7.10s of 2021 were up 1/4 to 99 1/2-3/4 to yield 7.12%.

Short-term note yields sank five to 10 basis points in light trading as the sector's supply problems ebb.

In secondary trading, March New York State Trans were quoted at 5.31% bid, 5.27% offered near the end of cash trading, while December New York State Trans were quoted at 4.95% bid, 4.80% offered. Los Angeles Co. notes were quoted at 4.86% bid, 4.83% offered. New Jersey Trans were quoted at 4.85% bid, 4.80% offered.

Looking ahead, economic news this week features industrial production and capacity utilization for June, to be released today, followed by the more important June consumer price index and June housing starts on Wednesday.

Thursday, jobless claims for the week ended July 6 will be released.

"CPI should confirm what we already know, but the housing number could be interesting," Mr. Kochan said. "It should come in nearly unchanged, but it could show that it's stalling a bit. You're going to see a recovery, but a slow one."

Looking ahead to supply, the negotiated sector features several issues exceeding $200 million, including $175 million Brea Public Finance Authority, Calif., tax allocation revenue bonds, to be priced by Stone & Youngberg, $151.4 million Brazos Higher Education Authority, Tex., student loan revenue refunding bonds, to be priced by the Texas Commerce Bank National Association Houston, and $150 million Kansas City School District, Mo., GO school bonds, to be priced by Prudential Securities.

Also featured are $140 million Montana Board of Investments payroll tax revenue bonds, which will carry MBIA insurance, and will be priced by Piper, Jaffray & Hopwood Inc.

In other news, Philadelphia plans to re-enter the market with its first issue since it was shut out last year due to a financial debacle. Kidder, Peabody & Co. will act as senior manager for $218 million of bonds. The offering will include $173 million of insured lease revenue bonds and $45 million uninsured bonds.

The insured bonds will come in two pieces, including $133 million backed by Financial Guaranty Insurance Co., and $40 million covered by Municipal Bond Investors Assurance Corp.

Traders said that they expect the bonds to come at a concession to the national insured market, but noted that the deal should get done.

"It's unfortunate that it's coming with a million other issues, but guys will buy it if it comes a little cheap," acknowledged one New York trader.

The competitive sector is dominated by $186 million University of California revenue bonds, $174.4 million Phoenix, Ariz., various purpose bonds, and $93.3 million California State University various series housing system revenue bonds.

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