Economic Week in Review

ECRI Weekly Leading Index 135.70 +.15%

The OECD predicted the U.S. economy will expand 4.7% this year, the fastest pace in two decades, up from an earlier forecast of 4.2% growth. The OECD predicts China's economy will grow close to 8% this year, notwithstanding recent attempts by the government to curb growth. Inflation in OECD member countries is seen slowing to about 1.7% this year on average, the lowest level in more than three decades, the OECD said. "The world economy is experiencing a strong and sustainable recovery," said OECD chief economist Jean-Philippe Cotis.

Federal Reserve policy makers will eventually raise interest rates to ensure inflation doesn't accelerate as the U.S. economy expands at a "solid" pace with "strong" job growth, said Michael Moskow, president of the Federal Reserve Bank of Chicago. Furthermore, U.S. Treasury Undersecretary John Taylor said Japan's economy has escaped a 13-year slump, and government policies may deliver lasting growth.

China's industrial production and M2 both grew at 19% from a year earlier as imports jumped 43%, contributing to China's fourth monthly trade deficit, Bloomberg reported. The Chinese government is trying to engineer a gradual economic slowdown by curbing investment and lending in certain industries. Failure of these measures may force the central bank to raise interest rates, Bloomberg reported. China will probably succeed in cooling its economy without rising interest rates or changing the Yuan's peg to the dollar, Standard & Poor's said.

The European Central Bank said recent economic reports confirm its view of an accelerating recovery in the dozen euro nations, suggesting it sees no need to cut interest rates further. While euro economies expanded at a modest pace at the start of the year, most recent date have been more encouraging, said the ECB in its monthly report.

U.S. Producer Prices rose .7% in April versus economists' expectations of a .3% rise and a .5% rise in March. Excluding volatile food and energy prices, the core rate rose .2%, meeting expectations and the same as the prior month. "With the economy growing rapidly and more than a year of commodity-price increases, there's a pretty clear formula for rising goods prices," said Kevin Harris, an economist at MCM.

U.S. Advance Retail Sales fell .5% in April versus expectations of .2% decline and a 2.0% rise in March. Retail Sales Less Autos fell .1% versus expectations of a .2% fall and a 1.8% rise in March. An early Easter holiday this year probably contributed to the jump in March and detracted from sales last month, economists said. Rising wages and renewed optimism are likely to keep consumers buying after tax refunds have been spent and underpin the economy later this year, Bloomberg reported. The economy created 625,000 jobs in March and April, the biggest two-month increase since the stock market bubble burst in March/April 2000, Bloomberg reported. "You are still going to see fairly solid consumer spending in coming months," John Shin, an economist at Lehman Brothers said.

U.S. Consumer Prices rose .2% in April versus expectations of a .3% rise and a .4% gain in March. CPI Ex Food & Energy rose .3% versus expectations of a .2% rise and a .4% increase in March. The Fed's Moskow downplayed recent signs of inflation, saying the fall in the value of the dollar that has increased import prices and led to higher commodity prices is "likely temporary," Bloomberg reported. Consumer prices are now expected to rise 2.2% this year, well below the 3% average rise over the last 84 years, Bloomberg reported.

U.S. Industrial Production in April rose .8% versus expectations of a .5% rise and a .1% decline in March. This was the seventh increase in the last eight months as companies made more semiconductors, computers, furniture and appliances. The proportion of industrial capacity in use rose to 76.9%, the highest since July 2001. Record low inventories relative to sales and exports at an all-time high are triggering bottlenecks, encouraging manufacturers to boost production to try and keep pace, Bloomberg reported. "Manufacturing in going full steam ahead," said Robert McGee, chief economist at U.S. Trust.

The preliminary Univ. of Mich. Consumer Confidence reading for May was 94.2 versus expectations of 96.0 and 94.2 in April. The economy is doing very well and jobs are picking up, but rising gasoline prices and negative news from Iraq are overshadowing the many positives, Bloomberg reported. U.S. motorists will pay an average of $1.94/gallon for gas this summer because of soaring crude-oil costs, strong demand and tight fuel inventories, the Energy Department said May 11.

Bottom Line: Overall, last week's data continued to paint a very bright picture of the current state of the U.S. and world economies. Economic growth is undeniably strong. Comments from European officials about the state of their economies were the most positive in a long time, which bodes well for many U.S. multinationals that have large exposure to the region. I also expect the Chinese government to succeed with their attempts at a soft-landing for its scorching economy. Low, but accelerating, inflation is a positive for stocks historically. Companies are regaining some pricing power, profits are soaring and hiring is accelerating. As well, most of the concerns about inflation revolve around crude oil and basic materials prices. While high oil prices are definitely having an impact, the media is making the problem out to be much worse than it really is at this point. Gas would have to reach $3.69/gallon, on an inflation-adjusted basis, to be equal to the prices American consumers paid at the heights of the Iran hostage crisis at the start of the 80's. Furthermore, basic materials prices will continue to fall in the near-term on an increasing U.S. dollar and slowing Chinese demand. I still expect the Fed to raise the Fed Funds rate 50 basis points at the June 29-30 meeting, while the market is anticipating a 25 basis point increase. A significant fall in the stock market or a sharp pullback in consumer spending could potentially push the rate hike out to a further date. Again, the main worry I have at this point is that the mainstream media's obsession with negativity is hurting investor psychology, thus potentially creating a self-fulfilling prophecy of slower economic growth.