Economic Week in Review

ECRI Weekly Leading Index 132.30 -.30%

Durable Goods Orders for May fell 1.6% versus expectations of a 1.5% rise and a 2.6% fall in April. Durable Goods Orders Less Transportation for May fell .7% versus estimates of a 1.3% rise and a decline of 1.7% in April. "There is so much volatility in durable goods orders, and there was so much strength in February and March that it is too soon to say if the declines in April and May are meaningful," said Christopher Low, chief economist at FTN Financial. Company officials "haven't found the gas pedal yet, but they've got their foot off the brake" on spending for new equipment, said John Chambers, CEO of Cisco Systems. However, SBC Communications said it will spend $4-$6 billion over the next five years on building a fiber-optic network that offers digital television service, Bloomberg reported. Tax cuts approved last year included a greater allowance for depreciating investments in equipment, giving companies incentive to accelerate spending this year. This provision is set to expire in 2005, likely resulting in increased corporate spending in the second half of this year, Bloomberg said.

Initial Jobless Claims for last week were 349K versus estimates of 340K and 336K the prior week. Continuing Claims were 2967K versus estimates of 2875K and 2892K prior. The U.S. has added 1.2 million jobs from January through May and the average number of weekly claims this year has fallen to 347,000 from about 402,000 in 2003. "The longer trend is clearly that we're in a self-sustaining recovery, that employment growth will continue but not at the rate of the recent past," said Carl Steen, market analyst at MFR. However, companies may increase wages at an even faster rate as the economy grows, demand for their products continues to be high and the slack in the labor market lessens, Bloomberg reported.

New Home Sales for May were 1369K versus estimates of 1125K and an upwardly revised 1192K in April. The number of homes sold and waiting to be started rose to the second-highest level ever, suggesting builders are struggling to keep up with demand. The new-home sales pace so far this year corresponds with total 2004 sales of 1.343 million houses, which would shatter the record of 1.085 million new homes sold last year, Bloomberg reported. "Our home traffic is very strong, our sales are very strong and we have houses waiting to be started. Our backlog is at an all-time high," said Alan Levan, CEO of Levitt Corp. Furthermore, Levan said interest rates would have to rise another 200 to 300 basis points before borrowing costs started to erode demand. Finally, the inventory of new homes for sale fell to a record-low 3.3 months' supply in May from 3.9 months in April.

Final 1Q Gross Domestic Product rose 3.9% versus estimates of 4.4%. Final 1Q Personal Consumption rose 3.8% versus estimates of 3.9%. Final 1Q GDP Price Deflator rose 2.9% versus estimates of a 2.6% rise. The trade deficit subtracted .7 percentage points from growth, about twice as much as estimated last month. "The trade deficit could be viewed as a sign of strength in demand in the U.S. economy," said Michael Moran, chief economist at Daiwa Securities. The core personal consumption expenditures price index, a favorite measure of inflation watched by Greenspan, rose 2.0%, more than the 1.7% estimated last month.

The Final reading of the University of Michigan Consumer Confidence Index for June came in at 95.6 versus estimates of 95.0 and a 95.2 prior estimate. "Consumer confidence is improving" as some of the negative impact from higher gasoline prices and violence in the Middle East fades, said Wesley Beal, chief economist at IDEAglobal. "The employment recovery will be more than enough to keep consumers spending." The addition of 1.2 million jobs this year is boosting incomes, and retail gasoline prices have fallen the past four weeks, Bloomberg reported.

Existing Home Sales for May came in at 6.8 million versus estimates of 6.5 million and 6.63 million in April. The median price of an existing home climbed 3.6% to $183,600 last month, the highest on record, Bloomberg reported. "With employment picking up, driving personal income, people are certainly going to be able to afford more," said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi. "The housing markets are very, very healthy," said David Lereah, an economist with the housing association. "People think interest rates are still very reasonable and inventories are very tight," said Daryl Jesperson, chief executive officer of Re/Max International. "The surge in mortgage applications for purchase in the spring points to strength in purchases of existing homes over the next month or two" when those sales close, said Stephen Stanley, chief economist at RBS Greenwhich Capital.

Bottom Line: I believe Durable Goods Orders for May were below-expectations because of the extreme strength earlier in the year. I expect orders accelerated in June. As well, corporate spending on technology should lead the way in the second half of the year. Initial jobless claims were a bit above expectations due to the shortened government work-week and continued re-tooling of major auto plants. Hiring should remain strong throughout the second half of the year as corporate spending accelerates. Home sales continue to defy the bears and skeptics. While interest rates have risen, they are still relatively low by historical standards. Increasing job opportunities and incomes are more than offsetting rates increases. Moreover, Americans are the wealthiest than at any time in U.S. history. As a result, more people are moving from apartments to homes or purchasing second homes for vacation purposes. U.S. economic growth should remain very strong throughout the year as GDP rises at the fastest pace since 1984. Inflation pressures should moderate as the year progresses. Slowing Chinese demand and falling energy prices should help keep inflation relatively subdued throughout the remainder of the year. Inflation is set to rise about 2.4% this year, below the last 40-year average of 3.0%. Consumer confidence should continue to rise and break recent highs, as survey's point to more Americans figuring out how good things are economically, notwithstanding the media's attempts to underreport all positive news.