Economic Week in Review

ECRI Weekly Leading Index 135.20 +.52%

New Home Sales for March rose to a record 1228K versus expectations of 1173K and 1128K in February. Builders such as Centex and D.R. Horton are confident rising employment will underpin sales, boosting the economy. A measure of the supply of homes for sale fell to the lowest since August. "Lean inventories and mortgage rates that are still low even if they have started edging up in recent weeks, suggests this is still going to be a very strong year for housing," said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi.

The Conference Board's Consumer Confidence Index rose to 92.9 in April versus expectations of 88.5 and an 88.5 reading in March. "When non-farm payrolls rise by 308,000 in a month, it's going to help consumer confidence," said Delos Smith, a Conference Board Economist.

Existing Home Sales rose to 6.48M in March versus expectations of 6.2M and 6.13M the prior month. The 5.7% increase was the second-fastest pace on record. Re-sales account for 85% of the housing market. U.S. home ownership in the three months through March set a record for the third quarter in a row.

Gross Domestic Product for the first quarter rose 4.2% versus expectations of 5.0% and 4.1% in the fourth quarter. The rise was paced by consumer spending and business investment in office equipment and software. The GDP price deflator, a measure of inflation, rose at a 2.5% annual rate, the most since mid-2001. Unadjusted for inflation, GDP rose at a 6.8% annual rate. "These somewhat higher prices will boost corporate profits, which should permit greater investment and hiring," said Rich Yamarone, chief economist of Argus Research. Higher refund checks because of last year's tax cuts and the Fed's lowest interest rate in four decades helped boost retail sales, while more orders for equipment suggest businesses are gaining confidence that may lead to more hiring, Bloomberg reported.

Personal Income for March rose .4%, meeting expectations, versus a .5% rise in February. This is the strongest three-month pace for income growth since the stock market bubble burst in 2000. Personal Spending for March rose .4% versus expectations of a .7% rise and a .4% rise in February. Spending also benefited from tax refunds and mortgage re-financings.

The University of Michigan Consumer Confidence Index fell to 94.2 in April versus expectations of 94.0 and a final reading of 95.8 in March. Violence in Iraq and record-high gasoline prices likely offset very good economic data, leading to the slight decline, Bloomberg reported.

The Chicago Purchasing Manager report rose to 63.9 in April versus expectations of 61.0 and a reading of 57.6 in March. "Inventories are very lean," Mike England, chief economist at Action Economics said. "Factories are scurrying to rebuild their stocks." The index confirms other reports that showed manufacturing continues to strengthen, Bloomberg reported.

Bottom Line: The housing market continues to exhibit extraordinary strength. While it will likely cool a bit in coming months, an improving labor market should prevent any significant weakness. However, with homebuilding stocks up about 60% over the last 12 months, further weakness in the group should be expected in the near-term within the context of a secular bull move. Consumer confidence readings remain relatively strong considering the daily barrage of negative reporting, high gas prices and recent spurt of violence in the Middle East. Moreover, consumers' exceptionally strong spending patterns over the last few weeks paint an even more robust picture of the true state of the consumer psyche. GDP growth, while not exceptional after inflationary adjustments, was very good once again and will certainly be revised upwards. The U.S. economy has grown 5.5% on average over the last 3 quarters, the best performance since the early 80's. The Chicago Purchasing Manager report is a key gauge of mid-western manufacturing activity. It is also improving at the fastest rate since the early 80's. Overall, the economic data released last week continued to paint a very bright picture of the current state of the U.S. economy. While inflationary pressures have increased, they remain relatively low and should not be a serious problem for the foreseeable future.