Economic Week in Review

ECRI Weekly Leading Index 134.30 -.89%

Advance Retail Sales for March rose 1.8% versus expectations of .7% and a 1.0% rise the prior month. Retail Sales Less Autos for March rose 1.7% versus expectations of .6% and a .6% gain in February. This was the strongest retail performance since just before the stock market bubble burst in March of 2000. "This is a huge number, one of the strongest I've ever seen," said Cary Leahey, a senior economist at Deutsche Bank. Moreover, building material and garden supply stores sold 10.6% more last month, the biggest increase ever recorded. Finally, Wal-Mart, J.C. Penney and Target said that March sales were stronger than expected, as shoppers spent tax refunds and demand for spring clothing surged. Consumer spending, which accounts for 70% of GDP, is now projected to grow 3.7% this year after a 3.1% gain in 2003. "Consumers are spending as if job and income prospects are solid," wrote Deutsche Bank economists LaVorgna and Riccadonna, in a report to clients.

The Consumer Price Index for March rose .5% versus expectations of .3% and a .3% rise the prior month. CPI Ex Food & Energy rose .4% in March versus a .2% forecast and a gain of .2% in February. So far this year, consumer prices are rising at a 5.1% annual rate compared with a 5.4% pace at the same time last year. Increasing demand is helping companies lift prices and giving them more confidence to hire. Finally, San Francisco Fed Bank President Robert Parry told reporters that while the rise in prices wasn't "comforting," the Fed won't become "excessively concerned" until there's a series of similar monthly increases.

The Empire Manufacturing Index rose to 36.05 in April versus expectations of 28.25 and a reading of 25.33 in March. The Empire Manufacturing Hiring Index more than doubled this month to 19.8 from 9.7 in March. The Philadelphia Fed reported a rise to 32.5 in April versus expectations of 26.1 and 24.2 the prior month.

Industrial Production in March fell .2% versus expectations of a .3% rise and up .8% in February. The drop in production at the nation's factories, mines and utilities was the first since May. "It really was held down by utilities, and that is just a weather effect," said Robert Mellman, an economist at JP Morgan. The third-warmest March in 110 years depressed utility production.

The University of Michigan Consumer Confidence Index preliminary April reading fell to 93.2 versus expectations of 97.0 and 95.8 last month. A burst of violence in Iraq, the 9/11 hearings and record-high gas prices contributed to the drop.

The economy is now projected to grow 4.6% this year, the most since 1984, according to the median estimate of 74 economists surveyed by Bloomberg News. One sign companies are having trouble keeping up with demand is that inventories in February were enough to last only 1.33 months, the leanest ever. As well, Treasury Secretary John Snow said strong economic growth is lifting tax revenues and should reduce the Treasury's borrowing needs this year.

BOTTOM LINE: There are several key takeaways for the week. The exceptionally strong retail reports and inventory building leads me to believe that 1st quarter GDP growth will be closer to 6.0% than 5.0%. The current estimate by economists is for 4.8% growth. Improving job prospects, tax refunds, all-time high consumer net worth, the fastest U.S. economic growth in 20 years, relatively low interest rates and a stock market up almost 30% in the last 12 months are all contributing to a significant pick-up in spending by the U.S. consumer. Companies have begun building inventories, but not enough to meet rising demand. Thus, leaving inventories at record lows relative to sales, which bodes well for further inventory building in future months.

While prices of many goods are rising, they are only now back to their 20-year trend and are increasing at a slower rate than at this same time last year. Subdued unit labor costs and a rising U.S. dollar will likely keep inflation in check for the foreseeable future. Without the burst of violence in Iraq and the politically-charged 9/11 hearings, I believe consumer confidence would have risen substantially. The fact that it is now apparent that there was not a "mass up-rising" in Iraq and the end of the 9/11 hearings should lead to a much better consumer confidence report next month. The bears and the mainstream press harped incessantly about the "weakness" of the "jobless" recovery. Now that these arguments appear ridiculous, inflation will be the scare tactic of choice. Deflation was the worry just a few months ago. 70% of inflation comes from unit labor costs which are historically low, only 5% comes from commodity costs. While it is possible that inflation will become a problem within the next 5 years, I don't expect it to rise substantially in the foreseeable future.