Economic Week in Review

ECRI Weekly Leading Index 131.90 +.69%

The ISM Manufacturing Index for July was 62.0 versus estimates of 62.0 and 61.1 in June. The ISM Prices Paid Index for July was 77.0 versus estimates of 79.0 and a reading of 81.0 in June. U.S. manufacturing strengthened in July at a rate near the 20-year high set in January amid gains in orders and production, a sign the economy began to accelerate after a second-quarter slowdown, Bloomberg said. The Index has exceeded 60 for nine straight months, the longest such stretch since July 1972 through June 1973, Bloomberg reported. "Manufacturing is picking up and inflationary pressures are coming off a bit and that's good news for manufacturers," said Drew Matus, a senior economist at Lehman Brothers. "The slowdown in GDP growth seen in the second quarter is unlikely to last long," said Henry Willmore, chief U.S. economist at Barclays Capital.

Personal Income for June rose .2% versus estimates of a .3% rise and a .6% increase in May. Personal Spending for June fell .7% versus an estimate of a .1% decline and an increase of 1.0% in May. The Core PCE Deflator, Greenspan's favorite measure of inflation, rose 1.5% versus estimates of a 1.7% increase and a rise of 1.5% in May. June capped the weakest quarter for consumer spending since the 2001 recession, Bloomberg said. Higher gasoline prices, less tax-cut stimulus, the first quarter spike in home buying and extraordinarily wet weather likely restrained spending economists said. "There isn't any reason to think that spending won't come back in July," said Cary Leahey, a senior economist at Deutsche Bank.

Total Vehicle Sale for July were 17.3M versus estimates of 16.8M and 15.4M in June. Domestic Vehicle Sales for July were 14.1M versus estimates of 13.3M and 12.2M in June. Incentive spending at all the manufacturers was up an average of $380 to $2,747. Sales at General Motors and Ford were down year-over-year, while DaimlerChrysler and Toyota were up, Bloomberg reported. "As we've seen in any given month consumers still respond to pricing opportunities," said Paul Ballew, chief sales analyst for General Motors.

Factory Orders for June rose .7% versus estimates of a .5% rise and an upwardly revised increase of .4% in May. "We are seeing the best environment in over three years for industrial manufacturers," said Eaton's CEO Sandy Cutler. "We believe we're beginning to see this economy build broadly." Business investment last quarter rose at a 10% annual pace compared with an 8% gain in the first three months of the year. Corporate spending last quarter supplanted consumer purchases as the main contributor to growth for the first time since early 1995, Bloomberg reported.

The ISM Non-Manufacturing Index for July rose to 64.8 versus estimates of 61.5 and a reading of 59.9 in June. The index now has exceeded 50, signaling expansion in industries that account for 85% of the U.S. economy, for 14 straight months. "The service sector is humming," said Sung Won Sohn, chief economist at Wells Fargo. The index of new orders for non-manufacturing companies rose to an all-time record while the inventory component of the index fell. The number of companies adding workers fell to 18% in July from 27% a month earlier, Bloomberg said. "There's nothing in our business sector, the freight sector, that I can say I have cautions about," said Douglas Duncan, CEO of FedEx.

Initial Jobless Claims for last week fell to 336K versus estimates of 340K and 347K the prior week. Continuing claims fell to 2911K versus estimates of 2920K and a downwardly revised 2946K prior. The Unemployment rate for July fell to 5.5% versus estimates of 5.6% and 5.6% in June. The unemployment rate is now at its best level in almost three years, Bloomberg reported. The Change in Non-farm Payrolls for July fell to 32K versus estimates of 240K and a downwardly revised 78K in June. "I have little doubt that the Fed will raise rates by 25 basis points next week, but the odds of moves in September and beyond have obviously diminished," said Stephen Stanley, chief economist at RBS Greenwich Capital. The July payrolls number "doesn't justify what we're seeing in the marketplace," said Jeff Joerres, CEO of Manpower. "When we talk to CEOs or heads of human resources, they're looking at their book of business and seeing that it's very good." The Change in Manufacturing Payrolls for July rose to 10K versus estimates of 10K and an upwardly revised loss of 1K in June. "Any fear of a major disruption in the economy due to the June slowdown in misplaced," said Brian Wesbury, chief economist at Griffin Kubik Stephens & Thompson.

Bottom Line: Overall, last week's data points were good, notwithstanding the shortfall in payrolls for July. Manufacturing continues to improve at rates not seen in decades. As well, more and more data show that inflation has peaked intermediate-term and is heading lower. The decline in oil prices I see in the next few months should solidify this view. I continue to believe that the decline in consumer spending is temporary. June was the wettest month on record for the entire Southeast and sixth wettest for the entire country. As well, the spike in home sales during the first quarter likely left the consumer a bit tapped out. Gasoline prices fell 5% last week and will likely head lower in the coming months. Finally, auto sales appear to be rebounding already and interest rates are plunging, which bodes well for intermediate-term consumer spending. The service sector, which accounts for the vast majority of the U.S. economy, appears to be rebounding to very high levels as well. It was very good to see the unemployment rate decline for the first time in a number of months. However, the dramatic slowdown in payrolls is worrisome. I believe that CEOs are highly disturbed by the anti-business political rhetoric and possibility of terrorism before the U.S. election. Thus, they have temporarily reigned in spending to an extent and hiring considerably. Less anti-business political rhetoric after the election, pent-up demand and an end to tax incentives at year-end should lead to a very good fourth quarter for corporate spending and hiring.