Economic Week in Review

ECRI Weekly Leading Index 131.7-.68%

Sales at U.S. retailers excluding auto dealers increased .9% in January, the biggest rise in 5 months, as consumers used their Christmas gift cards, taking advantage of post-holiday discounts. As well, cold weather across much of the nation led to increased sales of sweaters and coats. There does not appear to be a retail slow-down so far in February. The same bad weather that helped retailers hurt auto dealers. Including autos, sales fell .3% in January, the first drop since Sept. of 03. However, economists are expecting auto sales to snap back sharply in February with better weather conditions.

The number of Americans filing first-time jobless claims unexpectedly rose by 6,000 last week. Bad weather may have resulted in temporary layoffs at construction related companies, a government spokesman said. It is my opinion that the over-capacity created by the bubble of the late 90's is resulting in an extended time-line for our current recovery. All the expected signs of economic recovery are occurring, but at a leisurely pace. However, this over-capacity is finally being burned off with vigorous U.S. demand in many sectors reported during the last 2 quarters and extending into this quarter. Recently, Cisco Systems and Micron Technology, two of the largest U.S. tech companies, stated that component shortages in their latest quarters are causing them to increase purchases for their inventories from suppliers. Vanguard, one of the largest investment firms in the world, stated this week that a substantial increase in customer interest and activity has resulted in a need to hire a lot of new people quickly.

Furthermore, recent reports showing the ratio of inventories-to-sales at all-time record lows, orders improving for manufacturers more than at any time in 50 years, and a decrease in productivity from 9.2% in the 3rd Q to 2.7% in the 4th Q also point to an increase in hiring very soon. Greenspan went out of his way to point this out several times in his testimony to Congress. Companies have finally squeezed every last ounce of productivity out of their current employees. With GDP growth rising at its fastest past in 20 years, during the last six months, burning off most of the excess capacity produced during the bubble, companies are ready to start hiring again to meet increased demand. Employment has always been a lagging indicator by about 6 months after substantial economic growth. Since substantial growth didn't occur in this recovery until the 3rd Q of 03 and the over-capacity issue is resulting in a push-out of usual recovery characteristics, I believe we are right on schedule for significant job growth within the next 3 months.

The University of Michigan Consumer Confidence Index fell unexpectedly in February to 93.1 from January's near 4-year high reading of 103.8. It is my belief that this decline was a result of several factors. First, I have never seen a greater disconnect between what is really occurring and what the mainstream media are reporting. The media's constant focus and obsession with all things negative could be the result of election year politics or the incorrect assumption that Americans prefer this type of reporting. It is very rare to turn on the nightly news without hearing about how bad the employment situation is, another new terror threat, an attack in Iraq or a new political scandal. I also think an increase in energy prices may have contributed to the decline in sentiment. I am closely following this situation. I am worried that energy prices could cause significant harm to the U.S. economy within the next couple of years. Finally, January's reading of 103.8 was the highest reading since November of 2000. A fall in February from this sharp spike up should have been expected.

BOTTOM LINE: With tax refunds and an improving labor market on the near-tear horizon, it is likely that the consumer will continue to spend. As well, interest rates remain near 46-year lows. These factors, combined with the multi-decade highs in many data points related to increased corporate profitability and spending, leads me to believe that the possibility of a substantial period of U.S. economic prosperity is rising.