Economic Week in Review

ECRI Weekly Leading Index 131.70 +.23%

The Empire Manufacturing Index fell to 12.57 in August versus estimates of 32.3 and a reading of 35.75 in July. Readings above zero indicate expansion. Thirty-four percent of the state's manufacturers, down from 46% in July, reported an increase in new orders, pushing the measure of new orders to the lowest in almost a year, Bloomberg said. "We've seen a little bit of a lull this month," said David Freund, vice president of operations at Selflock Screw Products in East Syracuse, New York. Selflock believes business will accelerate again after the Republican convention in September, Bloomberg reported.

International investors stepped up purchases of U.S. securities in June amid faster U.S. economic growth than in Europe and Japan, Bloomberg reported. "The purchases may alleviate concern about the attractiveness of U.S. assets after a government report Friday showed the U.S. trade deficit widened," said Stephen Jen, head of currency research at Morgan Stanley in London. "Some investors are too fixated on the U.S. deficit," said Jen, who used to work at the International Monetary Fund and Federal Reserve. "If you look at the demand for dollar assets and U.S. Treasuries, it's hard to say people have a lot of fears about financing the U.S. deficit."

The NAHB Housing Market Index rose to 71 in August versus expectations of 67 and a reading of 67 in July. A reading above 50 means that builders view market conditions as more positive than negative. The index has exceeded 60 for 15 months in a row, Bloomberg said. "With the ongoing favorable financing climate and solid house-price performance, we have good reason to expect continue strength in the housing market in the months ahead," said Bobby Rayburn, the NAHB President. A gauge of buyer traffic in the builders' survey rose to 57, the highest since May 1999. NAHB is forecasting housing starts of 1.9 million in 2004, the most since 1978, and record single-family starts of 1.56 million, Bloomberg said. Finally, the National Association of Realtors increased its estimate for home sales last week for the eighth time this year, saying low mortgage rates and an improving economy will spur the housing market to records for both existing home sales and new home sales, Bloomberg reported.

The Consumer Price Index for July fell .1% versus estimates of a .2% rise and a .3% increase in June. CPI Ex Food & Energy for July rose .1% versus estimates of a .2% gain and a .1% rise in June. The decline in the CPI was the first drop in eight months, as shoppers paid less for gasoline, clothing and transportation, Bloomberg reported. Slowing inflation underscores Federal Reserve policy makers' comments that recent price increases will prove temporary, Bloomberg said. Energy prices, which account for about a 14th of the index fell 1.9% in July, the first decline since November.

Housing Starts for July were 1.98M versus estimates of 1.9M and an upwardly revised 1.83M in June. The 8.3% increase was a result of builders responding to the best two months of home sales on record. Construction permits, a sign of future activity, also increased, Bloomberg reported. The pace has averaged 1.94M units so far in 2004, surpassing last year's 1.85M, the most in 25 years, Bloomberg said. This was a "much stronger than expected report as inventories of new homes are quite lean and housing affordability is still very high," said David Greenlaw, chief U.S. fixed income economist at Moran Stanley. However, August starts in the South may be weaker in the aftermath of Hurricane Charley, which caused at least $11 billion of damage in Florida, Bloomberg said.

Industrial Production for July rose .4% versus estimates of a .5% increase and a .5% fall in June. Capacity Utilization for July was 77.1% versus estimates of 77.5% and 76.9% in June. U.S. industrial production strengthened for the third time in four months, led by business equipment such as computers and semiconductors, Bloomberg said. "This part of the economy is on pretty sound footing," said John Hermann, chief U.S. economist at Cantor Fitzgerald. "It's not a blistering pace, but it's a relatively solid pace that fits in with Greenspan's view that the economy is poised to resume stronger growth."

Initial Jobless Claims for last week fell to 331K versus estimates of 335K and 334K the prior week. Continuing Claims were 2.9M versus estimates of 2.87M and 2.89M prior. Claims are "trending down to the lower part of the range and that's consistent with an underlying labor market that is still sound and stronger that what the payroll numbers suggest," said Michael Gregory, senior economist at BMO Nesbitt Burns.

Leading Indicators for July fell .3% versus estimates of a .1% fall and a .1% decline in June. The index of coincident indicators, a gauge of current economic conditions, rose .1% last month. It tracks payrolls, incomes, sales and production, Bloomberg said. A declining stock market, rising energy prices and a fall in the money supply contributed to the decline in the leading index, Bloomberg reported. "There's a lot of uncertainty right now with the presidential elections and oil prices and kind of the mixed economic numbers," Agilent Technologies DEO Barnholt said. A recent survey by the National Association for Business Economics(NABE) showed that forty percent of CEOs believe terrorism is the biggest near-term threat to the U.S. economy, more than twice the percentage concerned about terror in a March poll, Bloomberg reported.

The Philadelphia Fed's Index for August was 28.5 versus estimates of 30.0 and a reading of 36.1 in July. The index is "more an indication of a pause in rapid growth than anything else," said Michael Trebing, an economist at the Fed bank. "The overall conclusion is we are still seeing growth." The component of the index that measures the outlook for six months from now rose to 52.7, the highest since January, Bloomberg said. The increase in the expectations index is "telling us that any pullback in the Philadelphia area manufacturing sector should be temporary," said Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities.

Bottom Line: Overall, last week's economic data were mixed. Measures of manufacturing mostly weakened, but gauges of the future outlook remain relatively strong. Recent surveys say that terrorism worries ahead of the election are weighing heavily on executive purchasing decisions. Strong demand for U.S. securities by foreign investors continues to show that inflation and deficit fears perpetuated by the media and bears are overstated at this point. Many recent economic releases show inflation slowing, including the CPI last week. In my opinion, oil is at an intermediate-term high and will begin falling to the mid-30's within the next few months which bodes well for future inflation readings. As well, slowing demand from China should hold commodity prices in check. The U.S. housing market remains exceptionally strong. The supply of homes in the U.S. is relatively low compared to demand and future gauges of buying activity point to sustainable strength. I continue to believe overall U.S. economic activity will re-accelerate in the fourth quarter. Executive worries over terrorism and anti-business political rhetoric are the two main reasons U.S. growth has recently slowed from the torrid pace seen earlier in the year.