Economic Week in Review

ECRI Weekly Leading Index 133.80 unch.

U.S. Existing Home Sales rose 2.5% in April to 6.64 million houses at an annual rate, the second-highest level on record and above estimates of 6.46 million. Increased hiring and tax cuts has given consumers more money to buy while forecasts for higher interest rates may be encouraging some people to purchase homes now, Bloomberg reported. "Continued vigorous job gains and accompanying income growth are likely to partially offset the impact of the run-up in borrowing costs," said Stephen Stanley, chief economist at RBS Greenwich Capital.

The Conference Board's Consumer Confidence Index rose to 93.2 in May versus expectations of 94.0 and a reading of 93.0 in April. The final Univ. of Mich. Consumer Confidence reading for May was 90.2 versus expectations of 94.2 and a prior forecast of 94.2. The constant barrage of negative headlines on Iraq and rising gasoline prices is taking its toll on the consumer's psyche, Bloomberg said. While the strongest job gains since the stock market bubble burst in 2000 are barely reported, they have a much greater affect on consumer spending. If the recent increase in oil costs are maintained this year it will subtract about $35 billion from after-tax income. However, a 200,000 increase in payrolls a month on average for the remainder of the year will boost incomes by $71 billion, Bloomberg reported. Consumer spending is currently projected to rise 3.9% this year, the most since 2000. This improvement will contribute to a 4.6% increase in U.S. economic growth, the best performance in two decades, according to the median forecast.

Durable Goods Orders for April fell 2.9% versus estimates of a .9% decline and a 5.7% rise in March. A drop in bookings for commercial aircraft and automobiles led the decline. "The two previous months were huge increases, so you can't be surprised if it gives back some of those gains," Ken Mayland, president of Clear View Economics said. The two-month gain before April was the biggest since record-keeping began in 1992, Bloomberg reported. Shipments of personal computers will probably rise 14% in the second quarter, matching the projected increase for all of 2004, researcher Gartner Inc. said. A need to replace almost 100 million obsolete PCs this year will contribute to the gains, Bloomberg said.

New Home Sales for April fell to 1093K versus estimates of 1200K and a level of 1239K in March. Last month's sales pace was the slowest since November and follows an all-time record in March. The median sale price of a new home climbed to $221,200 from $203,300. California home prices had their second-biggest increase in 26 years in April as the median price rose 24.6% from a year earlier, the state Association of Realtors said. "I don't think the case is there yet that housing is weakening significantly. This could just be payback for March's record high," said James O'Sullivan, senior economist at UBS Securities. Even with the April decline, the sales pace so far this year corresponds with another all-time record for new home sales.

The U.S. economy grew at a 4.4% annual pace in the first quarter, faster than estimated last month, but below the most recent estimates of 4.5% growth. Corporate profits jumped 31.6% in the 12 months ended in March, the biggest increase since the first quarter of 1984. Increasing sales and profits have given companies the confidence to ramp up production and increase hiring, Bloomberg reported. "We have moved clearly into a self-sustaining expansion," said Peter Kretzmer, a senior economist at Banc of America Securities. Moreover, the report showed the U.S. economy expanded 5% during the 12 months ended in March, the most since 1984. As well, nominal GDP rose 7.2% during this period. Rising oil prices don't threaten the U.S. economy enough to make the IMF change its forecast of 4.6% growth this year, the most since 1984, Bloomberg reported. Finally, the personal consumption expenditures price index excluding food and energy, Greenspan's favorite inflation gauge, rose only 1.7% in the first quarter.

Personal Income for April rose .6% versus estimates of a .5% gain and a .4% rise in March. Personal Spending in April rose .3% versus estimates of a .2% gain and a .5% rise in March. The rise in American incomes was the most in 3 years, Bloomberg said. "Consumer spending is hanging in there, and it will get help from the pick up in the labor market," said James O'Sullivan, senior economist at UBS Securities. "Inflation is poised to continue to rise at a measured pace, which is also likely to be the speed at which the Fed moves to raise interest rates," said Joseph LaVorgna, chief US fixed-income strategist at Deutsche Bank.

Initial Jobless Claims for last week were 344K versus expectations of 335K and 347K the prior week. Continuing claims came in at 2948K versus estimates of 2923K and 2929K the prior week. The four-week moving average of jobless claims came in at 335,500, the lowest since 2000. Chicago-based CPRi, which provides temporary staffing and recruiting for companies including AT&T and General Motors has seen a jump in demand for its services in the past few months, Bloomberg reported.

The Chicago Purchasing Manager report came in at 68.0 in May versus expectations of 62.0 and 63.9 in April. The May reading was the highest since July 1988. A gauge of new orders also showed the highest reading since then. The index of prices paid was the highest since 1995. "Overall, this was a very strong report and suggests we're going to just keep trotting along here," said Kevin Harris, chief economist at Informa Global Markets.

Bottom Line: Overall, last week's data continued to paint a very positive picture of the current state of the U.S. economy. U.S. home sales will definitely slow from their recent record-setting levels to more moderate and sustainable growth. However, I do not think the home market is about to collapse as the underlying fundamentals are far too strong. Good growth is always better than great growth for the long-run health of any market. The media's obsession with negativity definitely seems to be affecting consumer confidence as many positive stories are under-reported or un-reported. However, there is very little empirical evidence of a strong correlation between consumer confidence and spending patterns. The drop in volatile Durable Goods Orders from record-high levels is not of concern at this point. Gartner's recent projection of 14% growth for PCs in the second quarter bodes well for MSFT, INTC, DELL and the tech sector in general. Even with the rise in energy prices and interest rates, the U.S. economy is poised to post its best growth since 1984. Oil would have to double in price to equal the inflation-adjusted levels seen during the Iran hostage crisis. Moreover, the U.S. economy is much less dependent on oil now than in the past. Inflation, while rising, is currently not a significant threat to growth. Consumer spending continues at a healthy pace, while it appears corporate spending is strengthening. The recent acceleration in job growth and wages should offset most of the effects of higher interest rates and gas prices. Finally, evidence continues to mount that the health of U.S. manufacturers is improving significantly for the first time in many years.