Economic Week in Review

ECRI Weekly Leading Index 133.80 -1.33%

Empire Manufacturing for May came in at 30.21 versus an estimate of 34.0 and 34.03 in April. This was the 13th consecutive monthly increase as more companies added workers to meet increased demand and shipments rose to a record. The index of prices paid rose to 17.5 from 13.1 the prior month. "U.S. industrial production is picking up and economic slack is being absorbed at a steady pace," said Sherry Cooper, chief economist at BMO Nesbitt Burns. "Prices received rose faster than prices paid for the first time in a while," implying that companies are starting to re-gain pricing power, said Elisabeth Denison, an economist at Dresdner Kleinwort Wasserstein.

Japan's economy grew at a much greater-than-expected 5.6% annual pace in the first three months of the year, expanding for an eighth straight quarter, as an export-led recovery spread to consumer spending, Bloomberg reported. Rising demand for Japanese cellular phones, digital cameras and other electronic equipment has fueled capital spending. Consumer spending, the strongest in years, accounted for more than a third of the expansion, Bloomberg reported.

U.S. Housing Starts in April were 1969K versus expectations of 1985K and 2011K in March. Building Permits for April were 1999K versus estimates of 1960K and 1975K in March. Increased job growth and other signs of economic expansion are keeping housing demand strong, even as mortgage rates rise, Bloomberg reported. "The housing economy is incredibly strong," said Joel Rassman, Chief Financial Officer of Toll Brothers.

President Bush nominated Alan Greenspan to a fifth term as chairman of the Federal Reserve, saying the central banker has done a "superb job" in guiding the U.S. economy to the fastest growth in two decades. Greenspan said he was "honored" by the nomination and would serve if confirmed again by the U.S. Senate.

Initial Jobless Claims last week rose to 345k versus a 328K estimate and 333K the prior week. Continuing Claims were 2943K versus expectations of 2956K and 2966K prior. The four-week moving average for continuing claims fell to the lowest level since 2001, Bloomberg reported. "When you look at some of the jobs data, when you look at some of the indexes around industrial production and confidence levels among businesses, I think all those things point up," Ron Sargent, CEO of Staples Inc. said.

Leading Indicators for April rose .1% versus estimates of a .2% rise and a revised .8% rise in March. The March increase was the strongest since May of 03, right before GDP growth exploded upwards to the fastest pace in two decades, Bloomberg said. "It's hard to see a second-half slowdown here," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. The increase in the index of leading indicators during the past year is "consistent with GDP growth of 6.75%." "The outlook for the economy is strong. It's almost absurd to be arguing anything else," said Tim Rogers, chief economist at Briefing.com.

Philadelphia Fed. for May was 23.8 versus estimates of 30.5 and 32.5 in April. The index, which reached a 10-yr high in January, has been in positive territory since June 2003, signaling continued economic expansion in the region. U.S. factories boosted production and added more workers to their payrolls than at any time in almost 4 years. Rising demand has kept inventories lean and will probably encourage manufacturers to keep employment growing and assembly lines humming, Bloomberg reported.

The Fed's pledge to raise interest rates at a "measured" pace is "not an unconditional commitment," Fed Governor Ben Bernanke said. "The pace of tightening will of necessity respond to evolving economic conditions." The Fed's preferred inflation measure, the personal consumption expenditures price index minus food and energy, rose at a 1.4% annual rate in March, up from 1.2% in February. Bernanke also said he still expects economic developments to be consistent "with a gradual adjustment of policy," with core inflation "likely to remain in the zone of price stability during the remainder of 2004 and into 2005."

China plans to raise interest rates for the first time in nine years unless steps taken so far to cool an investment boom produce a more pronounced slowdown in the economy, Vice Minister of Finance Lou Jiwei said. "The measures that have been taken have shown some effectiveness but the overheating problem hasn't been fully solved," Lou said. China's foreign trade is expected to grow at a slower pace this year as higher raw material prices curb exports and a government clampdown on investment slows imports, the country's commerce ministry said.

Bottom Line: There are several key takeaways for the week. First, U.S. factories are continuing to increase production to meet rising demand. Profits are soaring as companies regain pricing power, allowing them to hire more workers. Japan, the world's second largest economy, is contributing meaningfully to world growth for the first time in close to 15 years. The Japanese consumer which has not participated in past recoveries is finally gaining confidence. This very positive development is almost completely ignored by the financial media. Pent-up demand for housing remains robust. As more Americans gain employment demand will remain relatively strong, notwithstanding higher interest rates. Job growth should stay at high levels as executive confidence is high, corporate profits are soaring, inventories are low and demand remains strong. The revised March Leading Indicators number points to another spurt in economic growth in the near future. At a minimum, U.S. economic growth should stabilize at current high levels throughout the remainder of the year. Statements by multiple Fed members last week were very important. They said that they expect to raise rates at a moderate pace in the near future, however they WILL NOT allow inflation to become a problem. This should quell fears that the Fed was falling behind the curve with respect to inflation. Finally, China seems committed to slowing growth to a more sustainable level. While a hard-landing for the Chinese economy is still possible, the much more likely outcome is a soft-landing which would be very positive for the long-term economic health of the region and the world. I continue to expect a 50 basis point increase at the June 29-30 Fed meeting. However, a continuing rise in energy prices or a significant fall in stock prices could result in a 25 basis point increase or a delay in any rate hike. It is also very possible that the Fed decides to make an inter-meeting move of 25 basis points before the June meeting and another 25 at the meeting. This scenario is likely in the case of a significant fall in oil prices or much higher-than-expected inflation readings.