Economic Week in Review

ECRI Weekly Leading Index 132.70 +.45%

Advance Retail Sales for May rose 1.2% versus expectations of a 1.2% rise and a .6% decline in April. Retail Sales Less Autos for May rose .7% versus estimates of a .6% rise and a .1% fall in April. Rising incomes and more jobs are boosting sales at retailers such as J.C. Penney, Neiman Marcus and Wal-Mart, Bloomberg reported. "The sales figures look very strong," said Steven Wieting, a senior economist at Citigroup Global Markets.

Gary Stern, president of the Federal Reserve Bank of Minneapolis, said he sees no threat of rising inflation and the central bank is ready to adjust the pace at which it raises rates should that expectation prove wrong. New York City's economy grew at a blistering 7% annual rate in the first quarter of 04, outpacing the rest of the U.S. for the first time since the heights of the stock market bubble, Bloomberg reported. "The two main factors behind the increase were jobs and incomes," City Comptroller Thompson said. Finally, 32% of U.S. employers plan to add workers in the third quarter, the most since before the economy began to plunge into recession in 2000, according to a survey released by Manpower Inc.

The Consumer Price Index for May rose .6% versus expectations of a .5% rise and a .2% rise in April. The CPI Ex Food & Energy rose .2% versus expectations of a .2% rise and a .3% rise in April. Prices minus food and energy(core) were 1.7% higher than a year earlier, compared with a 1.8% rise in the 12 months ended in April. Last year, the core index rose 1.1%, the smallest yearly gain in 44 years as global competition and excess capacity kept companies from boosting prices.

The Preliminary University of Michigan Consumer Confidence reading for June was 95.2 versus expectations of 90.8 and a reading of 90.2 in May. Confidence rebounded amid increased hiring, higher wages, falling gasoline prices and improvement in Iraq, the survey showed.

Housing Starts for May were 1967K versus expectations of 1950K and an upwardly revised 1981K in April. Building Permits for May were 2077K versus estimates of 1970K and 2006K in April. U.S. homebuilders began work on more houses than expected in May and building permits rose to the highest level in more than 30 years, suggesting that rising rates have yet to curb demand, Bloomberg reported. Year-to-date, the rate of housing starts has averaged 2.12 million, on pace to surpass last year's total of 1.85 million, the most in 25 years. "A better performing economy -- jobs, income growth -- that trumps to a certain extent rising rates," said Ken Mayland, chief economist for Clear View Economics. U.S. employers added 248,000 workers in May and have created 1.2 million jobs just since the beginning of the year, Bloomberg reported.

Industrial Production for May rose 1.1% versus estimates of a .8% rise and a .8% rise in April. This was the largest gain in six years, as utilities generated more power and companies made more business equipment. Manufacturers are "doing a little more of the heavy lifting in the economy," said Jonathan Basile, an economist at CSFB. "Businesses are investing more and hiring more, and that is a good sign for the sustainability of the expansion."

The Producer Price Index for May rose .8% versus estimates of a .6% rise and a .7% rise in April. PPI Ex Food & Energy rose .3% in May versus estimates of a .2% rise and a .2% rise in April. "We're starting to see a lot of pipeline pressures building in prices, but the key question is whether companies can pass these on to consumers," said Stephen Stanley, chief economist at RBS Greenwich Capital.

Initial Jobless Claims for last week came in at 336K versus estimates of 340K and 351K the prior week. Continuing Claims were 2895K versus a downwardly revised 2864K prior. "We're in the early stages of a long expansion," said Douglas Lee, president of Economics From Washington. "We're in the middle of a red hot labor market," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi.

Leading Indicators for June rose .5% versus estimates of a .4% rise and an increase of .1% in May. Production workers put in longer weeks and delivery times slowed as companies tried to replenish inventories stripped by rising demand. "The data reflect a robust economic environment this spring and point to more of the same this summer," Ken Goldstein, an economist at the Conference Board said.

The Philadelphia Fed. Index rose to 28.9 in June versus estimates of 25.3 and a reading of 23.8 in May. "The data remain consistent with a robust factory sector," said Michael Englund, chief economist at Action Economics. "Manufacturing continues to run on all cylinders." 52% of the Philly region's factories said they were operating at 80% of capacity or higher compared with 29% six months ago, Bloomberg reported. The prices paid index component of the report fell to 51.9 from 59.6, Bloomberg said. "We see a very robust recovery across all the segments we serve," said William Zollars, CEO of Yellow Roadway, the biggest U.S. trucking company. The U.S. economy is still projected to expand 4.6% this year, the most since 1984, according to the median estimate of a Bloomberg survey.

Bottom Line: Retail sales continue to exceed estimates as more Americans are gaining employment and receiving higher wages which more than offsets higher interest rates and gasoline prices. Multiple Fed members reiterated their belief that inflation is not a problem and that they stand ready to increase the pace of rate hikes if this view changes. Both the CPI and PPI exceeded expectations last week, yet the yield on the 10-year T-note fell 9 basis points. Thus, signaling an intermediate-term change in investor perceptions regarding future inflation. This is a very positive and unexpected development. I believe consumer confidence bottomed last month and will take out its recent highs of 103.80 in the near future. Iraq is improving and gasoline prices are falling. These were the two main sources of consumer angst. A recent survey showing that 57% of all Americans thought the U.S. economy had lost jobs over the last 6 months, when in fact it has gained 1.4 million, also bodes well for future confidence readings. A combination of the media's under-reporting of anything positive and Americans tuning out most forms of media likely led to this staggering number. However, as the election gets closer I believe most Americans will look much more closely at what is going on in the economy and they will see a very positive picture, thus increasing consumer confidence. Housing continues to defy the skeptics and will set another record this year, however a mild slowdown will likely occur in the next few months. Manufacturing continues to improve at a very rapid rate as capacity utilization climbs. Factories are hiring more and workers are working longer hours to meet rising demand. As of now, most costs are not being passed on to the consumer due to exceptional levels of productivity and profitability. Overall, a very positive week for the U.S. economy as exceptional growth continued and inflationary expectations diminished.