Economic Week in Review

ECRI Weekly Leading Index 133.70 +.60%

The Conference Board's Consumer Confidence Index came in at 87.3 vs. expectations of 92.5 and a reading of 96.8 the prior month. This was the largest monthly drop since before the Iraq war began. At the same time, spending at U.S. retail stores in the week ended last Sat. rose 5.6% from a year earlier, according to the Instinet Research Redbook weekly sales report.

Durable Goods Orders fell 1.8% in January vs. expectations of a 1.4% gain and 1.6% growth the prior month. Excluding Transportation, which fell because of a significant decline in aircraft orders, the index rose 2.0% vs. expectations of a 1.8% rise and 1.7% growth last month. Orders for communications equipment rose 73.3%, the most since Jan. 1997. A measure for the demand for business equipment rose for the eighth time in nine months, the best performance since 1994. The inventory-to-sales ratio held at a record low of 1.4 months. "Replenishing inventories will make for a sizeable contribution to growth in the first quarter," said Bill Sharp, an economist at JP Morgan. Deutshe Bank's chief fixed-income economist said, "A meaningful pick-up in hiring cannot be far away with capital spending growing at an annualized 15-20 percent rate this quarter."

The U.S. economy expanded at a 4.1% annual rate in the 4th quarter, faster than the initial estimate, because businesses increased spending to rebuild inventories and buy equipment and software, the Commerce Department said. Therefore, last year's second half GDP growth rate of 6.1% was the strongest six months since the first half of 1984. The personal consumption expenditures price index, a measure of inflation tied to spending, which is watched closely by Greenspan, gained at a very low .7% annual pace.

The Chicago Purchasing Manager's Index declined to 63.6 in Feb. vs. expectations of 63.5 and a reading of 65.9 last month. The index has now held above 60 for 4 straight months, a stretch not seen since 1994-95. The employment component of the index rose to 54.8 this month, its highest reading since 1998. The Univ. of Michigan Consumer Confidence Index fell to 94.4 in Feb. vs. expectations of 94.0 and a reading of 103.8 last month.

During the course of the week, several comments came from Fed officials. Fed Governor Bies said that recent data suggest job growth may "pick up, perhaps substantially, over the course of this year." Greenspan said consumer debt burdens aren't a threat to the U.S. economic expansion because interest costs have fallen and financial obligations as a ratio to income aren't rising. Greenspan did say renters may be having more credit problems because they can't take advantage of rising property values to increase their wealth and sometimes have large student loans. Greenspan also said that "the U.S. economy appears to have made the transition from a period of sub-par growth to one of more vigorous expansion." He urged Congress to cut spending in order to retain tax cuts that stimulate the economy. Finally, Greenspan said "any tax increase large enough to reduce the deficit would pose significant risks to economic growth."

BOTTOM LINE: The very strong retail spending reports released last week lead me to believe that the consumer is quite confident about their financial situation. It is likely that politics and the mainstream media's focus on the current job situation led to the lower consumer confidence readings. The economy is doing very well right now and is poised to post the best year of growth in over 2 decades. Very strong consumer spending and the recent pick-up in corporate spending, with little inflation, strenthen this view. Employment is always a lagging economic indicator and to focus on this one data point is like looking in the rear-view mirror of an automobile while driving. I would be very worried if 4-6 months from now significant job creation hadn't materialized. All signs point to the contrary as of now.