Economic Week in Review

ECRI Weekly Leading Index 131.50 -.60%

Personal Income for May rose .6% versus expectations of a .5% rise and a .6% rise in April. Personal Spending for May rose 1.0%, the largest increase since October of 2001, versus estimates of a .8% rise and a .2% rise in April. The PCE Core Index, Greenspan's favorite measure of inflation, rose 1.6% year-over-year. Rising incomes reflect an economy that has created 1.3 million jobs this year, Bloomberg said. "We're very optimistic," said Tom Golisano, CEO of Paychex, a provider of payroll and employee-benefit services.

The Conference Board's Consumer Confidence Index for June rose to 101.9, the highest level in two years, versus expectations of 95.0 and a reading of 93.1 in May. Job gains, wage increases, improvements in Iraq and falling gas prices spurred confidence, Bloomberg said. The percentage of consumers that said they saw jobs as hard to find was the lowest since 2002. "Money in your pocket speaks the loudest," said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi. "Consumer perceptions of the labor market have finally caught up to reality and are outweighing concerns over Iraq and energy prices." Moreover, gasoline prices have fallen for five straight weeks, bolstering consumer attitudes, Bloomberg reported. "Leisure travel is very strong, and business travel is steadily getting better," said Thomas Parrington, CEO of Lodgian, an owner of 88 hotels. Finally, the survey showed the percentage of people planning to buy a major appliance in the next six months rose to 33.7, the highest in 6 years.

The Chicago Purchasing Manager Index fell to 56.4 in June versus expectations of 65.0 and a reading of 68.0 in May. The index had reached a 16-year high in May. "You can't accelerate forever once you hit your top speed," said Kevin Logan, a senior market economist at Dresdner Kleinwort Wasserstein. "We are still in growth mode, but the intensity of the pick-up is slowing down." A reading greater than 50 signals growth and the index has averaged 62.6 so far this year, one of the best averages on record, Bloomberg reported.

Federal Reserve policy makers raised the U.S. benchmark interest rate by a quarter-point to 1.25% and reiterated that further increases can come at a "measured" pace, as long as inflation remains "relatively low." The first increase since May 2000 came on a unanimous vote, a sign that no Fed member saw enough of an inflation threat to seek a more aggressive move. "Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors," the Fed said in their policy statement. "The economy is getting better and it needs to get better at a nice, gradual rate," said Charles Holliday, CEO of DuPont. "It doesn't need to soar up because then it soars down too fast."

The ISM Manufacturing Index came in at 61.1 in June versus expectations of 61.0 and a reading of 62.8 in May. ISM Prices paid fell to 81.0 in June versus estimates of 82.0 and a reading of 86.0 in May. The manufacturing index's reading of 61.1 was the eighth straight month it exceeded 60, the longest such stretch since July 1983-February 1984, Bloomberg reported. Business inventories held at a record low relative to sales at the start of the quarter, suggesting production gains in coming months will help lift the economy. "Ongoing strong demand, depleted inventory levels, and the more attractive value of the dollar relative to recent years all bode will for manufacturing over the near-term," said Michael Englund, chief economist at Action Economics.

The Unemployment rate for June held at 5.6%, meeting estimates. The Change in Non-farm Payrolls for June was 112,000 versus estimates of 250,000 and a downwardly revised 235,000 in May. The Change in Manufacturing Payrolls for June was -11,000 versus an estimate of 30,000 and a downwardly revised 24,000 in May. The U.S. economy has now created 1.3 million jobs this year, the best 6-month performance since the stock market bubble burst and the economy began to plunge into recession in 2000, Bloomberg reported. Recent evidence that the economy is slowing modestly from its torrid growth rate over the last year may support Federal Reserve policy makers' view that they need to raise interest rates at only a "measured" pace to contain inflation, Bloomberg said.

Bottom Line: Personal Income and Spending remained robust in May. As well, Greenspan's favorite inflation indicator, the core PCE Index, remained near historically low levels. The substantial increase in consumer confidence is a result of increasing wages, improving job prospects, falling gasoline prices and improvements in the big picture in Iraq. This is a very positive development as the good news on the economy is finally penetrating the media's negative filter and affecting consumer attitudes. This summer is shaping up to be one of strongest domestic travel seasons ever. Moreover, the scorching pace of home-sales bodes well for the purchase of new household appliances. Manufacturing appears to be slowing from its 20-year highs in growth to more sustainable levels. However, a pause should be expected as factories re-tool this summer for anticipated strong demand. Recent declines in commodity prices and interest rates should allow the Fed to raise rates at a measured pace. Current market expectations of 100 basis points of tightening through December are likely too high. While the volatile employment numbers were a bit disappointing, the trend is still very strong job creation for the U.S. economy. I would begin to worry if we see a few more weak months. Overall, the data last week appear to show that the U.S. economy is either pausing before finishing the year with another strong spurt of growth or is transitioning to more sustainable growth levels.