Economic Week in Review

ECRI Weekly Leading Index 133.80 +1.67%

The U.S. economic expansion is "solid" and inflation is "well-contained," Federal Reserve Bank of Richmond President J. Alfred Broaddus said. "In general the economy seems clearly to be in a much stronger position than it was a year ago or even at the beginning of the year," Broaddus said. Recent slowing in job growth and business investment are not a major concern, he said.

The ISM Non-Manufacturing Index for June came in at 59.9 versus expectations of 63.0 and a reading of 65.2 in May. "We aren't running as fast as in the previous several months, but those were unusually strong and it's only natural to look for this index to cool somewhat," said Michael Moran, chief economist at Daiwa Securities. The index has been above 50, showing expansion, for 15 straight months and Moran said he considers the report's separate indicators of higher orders and employment to be "encouraging." "This is one of those really odd reports -- the headline was terrible but the details were really good," said Joel Naroff, president of Naroff Economic Advisors.

A higher percentage of U.S. companies said profit margins widened last quarter, making businesses "upbeat" about the rest of the year, according to a survey by the National Association for Business Economics(NABE). 41% said they plan to increase hiring in the next six months, up from 34% in April. 61% expect to boost capital spending during the next year, up from 53% in the previous survey released in April. 37% said profit margins widened in the second quarter, the highest percentage since the fourth quarter of 1987. Finally, confidence among chief executives in the economy held near a 20-year high in the second quarter, with more than 70% of corporate leaders surveyed saying conditions are better than six months ago. "It doesn't look like we're at a point where we have to worry about anything that might derail the economic recovery," said Duncan Meldrum, chief economist of Air Products & Chemicals, and president of the economics group that conducted the survey. NABE's survey results "suggest any apparent weakness in the monthly data for retail sales and jobs is probably temporary," Meldrum said. "The underpinnings to the economy -- productivity growth that doesn't hold back hiring, strong capital spending, and healthy demand -- are still there," he said.

An index of optimism among U.S. manufacturers rose to a record high in the second quarter as more reported an increase in orders, a private industry survey found. Manufacturers Alliance/MAPI said its quarterly index measuring the change of business activity over the next three months rose to 80, the highest since the survey began in 1972. Manufacturing accounts for about a seventh of the U.S. economy, boosting job and income growth. The report "indicates that the expansion of manufacturing activity is real and robust," said Donald Norman, the group's economist and survey coordinator. A slowdown in China's economy and expanded production of key commodities may help contribute to lower inflation, the survey also found.

Initial Jobless Claims for last week fell to 310,000 versus estimates of 341,000 and a downwardly revised 349,000 the prior week. Last week's decline of 39,000 was the best showing since 2001, Bloomberg reported. The government said the total was likely skewed too low because fewer auto factories than it predicted shut to retool. Continuing Claims fell to 2872K versus estimates of 2950K and a downwardly revised 2957K prior. "When the dust settles from auto shutdowns, payrolls will increase at 150,000 to 175,000 a month on average," said Michael Englund, chief economist at Action Economics. The U.S. economy has created 1.3 million jobs so far this year, the biggest 6-month gain since before the stock market bubble burst and the economy began to plunge into recession in 2000, Bloomberg reported.

Consumer Credit for May rose to $8.2B versus estimates of $7.5B and $5.3B in April. U.S. consumer borrowing rose for a sixth straight month in May, as personal incomes increased and shoppers bought new cars at the fastest pace since December. Non-mortgage debt rose at an annual rate of 4.9% during the month the report showed. "The trend in borrowing has remained stronger than expected," said Christopher Low, chief economist at FTN Financial.

Wholesale Inventories for May rose 1.2% versus expectations of .5% and a .2% rise in April. More machinery, electrical equipment and imported cars brought the value of stockpiles to $305.5 billion. Supplies at distribution centers, warehouses and terminals in May were enough to last 1.13 months at the current sales pace after April's all-time low of 1.12 months. The U.S. is experiencing "the best economy we've seen in years," said Jeff Immelt, CEO of General Electric, the word's biggest company. The need to build inventories should boost economic growth for the rest of the year, according to Morgan Stanley economist Richard Berner, Bloomberg reported.

The U.S. economy will expand at least 4.5% by year-end, helped by low tax rates and strengthening global demand, said Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. The forecast suggests inflation "will stay below the 2% level in terms of the core consumer price index," Hoenig said. "We do not want to get ahead of the curve -- don't want to raise rates so quickly that we staunch the recovery -- and yet we don't want to get behind the curve." "Is there a defined path? No there isn't, there can't be," because the Fed must respond to new information, he said. He also said he wasn't discouraged by the June jobs report, which showed 112,000 new payroll employees for the month. "It would be a mistake to allow one month to cause a loss of confidence in this recovery." The outlook for the economy "is very positive," he said.

Bottom Line: The ISM Non-manufacturing reading of 59.9, while below recent all-time high levels, was still very high and the details of the report bode well for the near-term outlook of the service sector. With executive confidence at 20-year highs and profit margins expanding at more companies than in 17 years, it appears that the recent dip in hiring was only temporary. Manufacturing continues to improve at the fastest rate on record. As well, increased production of commodities and slowing U.S./Chinese growth from recent torrid levels, bodes well for declining inflation over the intermediate-term. Companies are beginning to rebuild inventories from record-low levels in a show of confidence in future demand. Multiple Fed members proclaimed that the economy will continue to grow at very healthy levels while inflation will remain in check. Overall, last week's data was very encouraging. I continue to believe that the economy is either pausing before another exceptional burst of growth later in the year or down-shifting to a more sustainable and less inflationary rate of growth. Expanding profit margins, increasing consumer/executive confidence and inventories near record low levels supports my view. Unseasonably wet/cooler weather, all-time high American vacationing and very strong home sales are likely resulting in lower-than-expected retail sales in some select areas. As well, continued overcapacity from the late 90's technology bubble results in earnings shortfalls in some companies with any slight downtick in demand as too many companies are still competing for the same dollars. I continue to expect an increase in technology spending later this quarter.