Economic Week in Review

ECRI Weekly Leading Index 134.10 +.30%

Construction Spending for April rose 1.3% to a record annual pace of $970 billion versus estimates of a .4% rise and an upwardly revised 2.4% increase in March. Builders completed homes at the highest rate since 1979 in April, the agency said last month. Government and company spending on construction may pick up the slack should home building slow later this year amid higher mortgage costs, Bloomberg reported. "We're still riding the wave of the super-strong housing starts numbers," said Ken Mayland, chief economist of Clear View Economics. "We can't expect these sorts of increases to persist in the second half, but the baton is being handed off as nonresidential is starting to perform better."

ISM Manufacturing for May came in at 62.8 versus estimates of 61.5 and a reading of 62.4 in April. ISM Prices Paid for May came in at 86.0 versus an estimate of 89.3 and a reading of 88.0 in April. The report showed that more factories were hiring than at any time in 31 years, Bloomberg reported. The index reached 63.6 earlier this year, the highest since December 1983 and has been greater than 60 for seven months in a row. Manufacturers are hiring workers and buying new equipment to boost production as sales improve. "Production should remain strong for many months and probably into 2005. I am very optimistic about manufacturing," said Richard DeKaser, chief economist at National City Corp.

The final 1Q Non-farm Productivity reading showed an increase of 3.8% versus estimates of a 3.7% rise and a prior estimate of 3.5%. The final 1Q Unit Labor Costs reading showed an increase of .8% versus estimates of a .4% rise and a prior forecast of .5%. Gains in productivity, aided by higher spending on equipment and software, may help companies hold down costs and prices as they try to keep up with orders and add to payrolls, Bloomberg reported. "We're now seeing a pickup in business investment spending, and that should help firms boost productivity even more," said Michael Moran, chief economist at Daiwa Securities.

Factory Orders for April fell 1.7% versus estimates of a 1.4% decline and an upwardly revised 5.0% increase in March. "April was essentially a month where orders took a breather," Stephen Stanley, chief economist for RBS Greenwich Capital said. As well, Factory Orders were up almost 11% compared to a year earlier.

ISM Non-manufacturing for May came in at 65.2 versus estimates of 66.0 and a reading of 68.4 in April. This gauge of activity at U.S. service companies, which make up the largest share of the economy, reached the fourth highest level on record as businesses increased hiring, Bloomberg said. The employment component of the survey reached its second highest level on record. Stronger employment and rising incomes are keeping households in a buying mood, which should help underpin economic growth for the rest of the year, economists said. "Since the beginning of the year, there has been a dramatic acceleration in the economy," said William Zollars, CEO of Yellow Roadway Corp., the biggest U.S. trucking company.

The Change in Non-farm Payrolls for May was 248,000 versus estimates of 225,000 and an upwardly revised gain of 346,000 in April. The Change in Manufacturing Payrolls for May was 32,000 versus estimates of 20,000 and an upwardly revised 29,000 in April. The Unemployment Rate for May held at 5.6%, meeting estimates and the same as April's rate. The gain in manufacturing employment was the largest in six years and the economy has now recouped all the jobs lost in the aftermath of 9/11 and the recession, Bloomberg reported. Moreover, employment has increased by 1.2 million so far this year, the best five months of job growth since the stock market bubble burst and the economy began to deteriorate in early 2000. "People wouldn't be hiring like this if they didn't have a high level of confidence," said Edward McKelvey, chief U.S. economist at Goldman Sachs.

Bottom Line: There are several key takeaways for the week. First, construction is on fire. Homebuilding will likely slow from its current torrid pace to a more sustainable level of good growth. Non-residential construction is now starting to accelerate as companies flush with record-high cash hoards are expanding operations. The secular downturn in manufacturing that began over a decade ago appears to be over. Factories are now hiring and expanding at very healthy levels. This should bring good economic growth to areas of the U.S. that missed out on the technology-led prosperity of the 90's. The recent pickup in business investment for technology products should result in continued high levels of productivity, allowing companies to shield their customers from significant price increases. Lastly, American's net worth is at all-time highs, incomes are rising and hiring is accelerating, more than offsetting the increase in energy prices and interest rates, resulting in strong demand for many goods and serives. Thus, the service sector, which accounts for 85% of the U.S. economy is very strong and getting stronger.