Friday, June 11, 2004

Economic Week in Review

ECRI Weekly Leading Index 132.90 -.89%

Consumer Credit for April fell to $3.9 billion versus estimates of $5.9 billion and an upwardly revised $9.3 billion in March. Measured at an annual rate, debt rose 2.3% in April after increasing 5.5% in March. Borrowing may again pick up with gains in payrolls and incomes, which may take some of the place of tax cuts and mortgage refinancing as a spur to the economy, Bloomberg reported. Employment has increased by 1.2 million so far this year and incomes are rising at the fastest rate in several years, Bloomberg said. "U.S. consumer spending continues to be healthy. Car sales went through the roof in May," said chief financial economist at Bank of Tokyo-Mitsubishi. Consumers' "willingness to pay full price at our stores is very strong and creating momentum," Burton Tansky, CEO of Neiman Marcus Group said. Finally, Ford Motor expects no "significant impact" on the company from U.S. interest rate increases this year, CFO Don Leclair said.

The National Association of Realtors said sales of existing single-family homes will rise to a record 6.17 million this year, bolstered by an accelerating economy. The estimate is higher than the forecast for 6 million re-sales that the group provided a month ago. "The higher employment rate has made it possible for more people to obtain loans, even as the cost of financing a home purchase increased as mortgage rates rose," said David Lereah, NAR's chief economist. Lareah said he expects the economy to add about 3 million jobs this year, Bloomberg reported. The median existing home price is forecast to rise 5.4% this year to $179,000, while the median new-home price likely will gain 7.9% to $210,000, Lereah said.

Fed Chairman Greenspan said the U.S. central bank is ready to raise interest rates and would accelerate the pace of increases if inflation picks up. The Fed "is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability" and ensure maximum sustainable economic growth, Greenspan said. Consumer prices are expected to rise 2.7% this year, the same rate as in 2000, and below the 45-year average rate of 3.0%, according to the median forecast of 45 economists polled by Bloomberg. "The exceptional reluctance to expand payrolls appears to have ended, and businesses are once again hiring vigorously. An increased willingness to borrow, and ample liquid assets, should provide a further lift to capital investment and, with it, economic activity," Greenspan said.

Wholesale Inventories for April fell .1% versus expectations of a .5% gain and a .5% gain in March. That brought supplies at distribution centers, warehouses and terminals to a record low of 1.12 months' worth in April. Lean inventories at wholesalers as well as factories suggest that companies may have to step up production and keep adding workers, Bloomberg reported.

The Import Price Index for May rose 1.6% versus estimates of a .8% gain and a .2% gain in April. Excluding petroleum, the index rose .4%. Imported petroleum prices rose 43.9% in the year ended in May, Bloomberg reported. A drop in oil prices this month "may or may not signal a trend, but is nonetheless welcome," Alan Greenspan said earlier in the week. Oil prices have dropped about 12% since reaching $42.33/bbl. on June 1.

Initial jobless claims rose to 352K last week versus expectations of 335K and 340K the prior week. Continuing Claims came in at 2881K versus expectations of 2972K and 2987K prior. Last week included the Memorial Day holiday, which can present a more difficult time to seasonally adjust the data, Bloomberg said. "Growth in payrolls is robust and the labor market is coming out of the doldrums. I would classify the job market as healthy," said Michael Englund, chief economist at Action Economics. "The next few weeks we're entering the preparation for auto retooling phase and because of that jobless claims will remain on the firm to slightly higher side, obscuring what would otherwise be an overall downward trend," said John Herrmann, chief U.S. economist at Cantor Fitzgerald.

U.S. household net worth rose to a record $45.15 trillion in the first quarter of 2004, Bloomberg reported. Another government report showed the federal budget deficit narrowed to $62.5 billion last month as the strengthening economy boosted tax revenue 12% and federal spending declined 7.5%. "The budget situation is improving -- no question," said John Herrmann, chief U.S. economist at Cantor Fitzgerald. Finally, another report showed that only 1.9% of the jobs lost during the first quarter were a result of outsourcing to other countries. "There is a lot of political sound and fury out there about outsourcing, but at the end of the day it's not a big source of weakness for the labor market," said Jay Bryson, global economist at Wachovia.

Most CEOs of U.S. companies with annual sales of $1 million to $1 billion said they expect to add workers, raise prices and increase profits during the next 12 months, according to a survey by TEC International, Bloomberg reported. 60% of the 1,100 CEOs participating in the quarterly TEC Confidence Index said they planned to add jobs. Moreover, only 6% said they planned to reduce their workforce. The TEC survey provides a glimpse into the thinking of the CEOs who run smaller companies. The organization's 9,000 member companies have a combined workforce of 1.1 million employees and annual sales of $280 billion. The survey also found that 73% of small-company CEOs said they planned to vote for President Bush, down from 74% last quarter. Support for Senator Kerry grew to 21% from 16%, Bloomberg reported.

Japanese consumer spending is driving the fastest growth in the G-7, spurring optimism a rebound in the world's second-largest economy will endure longer than two failed recoveries since 1991 and boost global growth, Bloomberg reported. "Purchasing power is rising and consumers are buying more expensive things now," said Tatsuhiko Izumi, president of Clarion Co., a maker of car navigation systems. Consumers accounted for more than a third of Japan's 6.1% annual growth in the first quarter. Spending by households headed by a salaried worker had a record 9.3% jump in April, Bloomberg said. Confidence among consumers was boosted by a 47% gain in the Nikkei in the year ended March 31, the biggest since 1973. "For almost a dozen years, the Japanese economy has been near zero growth and plagued by deflation. What we see now is strong sustainable growth and price stability," U.S. Treasury Undersecretary John Taylor said.

Bottom Line: Economic data released last week continued to show a very healthy U.S. economy. Consumer borrowing rose less-than-expected, which is a positive considering American's high debt levels. Job growth, rising incomes and record-high household net worth are more than offsetting the negative effects from higher interest rates and gas prices with respect to consumer spending. Multiple Fed members made statements last week that supported my view that they will hike rates by 50 basis points in the very near future. Rates are currently at emergency levels that are not warranted in today's vigorous economic environment. Record-low inventories, notwithstanding the recent surge in economic activity, bodes well for future economic growth and hiring. Inflation, while rising, is not currently a problem and is below its 46-year average. At current levels, inflation is actually a positive as companies regain pricing power, boost profits, increase production and hire more people. Americans' net worth is at all-time high levels, a very positive fact that is barely reported by the mainstream press, and is the main reason that higher energy prices and interest rates are not hurting the economy. Finally, Japan continues to improve and is leading the G-7 in economic growth, which is a big positive for global growth. Japan's recovery appears sustainable this time as consumers are participating for the first time in over a decade.

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