Saturday, September 25, 2004

Economic Week in Review

ECRI Weekly Leading Index 131.40 -.15%

Housing Starts for August were 2000K versus estimates of 1930K and 1988K in July. Building Permits for August were 1952K versus estimates of 1985K and 2066K in July. "I don’t know many people who can't buy homes because of mortgage rates, and there is still unmet demand for affordable homes," said Sun Won Sohn, chief economist at Wells Fargo. "Housing remains quite strong, and is still there as a source of support for the economy, however the decline in building permits does suggest that builders are turning somewhat more cautious," said Lynn Reaser, chief economist at Banc of America Capital. Starts in the northeast rose 6.5%, showing the most strength of any region and the best performance since 1990, Bloomberg said.

The FOMC raised rates 25 basis points to 1.75%. "With underlying inflation expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured," said members of the Fed in their policy statement. Low automobile and clothing prices helped hold the rise in the consumer price index to 2.7% for the year ended in August, below the average rate of inflation of 3.0% for the last 41 years, Bloomberg reported. The third rate-hike this year and the possibility the FOMC may keep raising rates suggests central bankers are confident that the world's largest economy will continue to expand, Bloomberg reported. "Output growth appears to have regained some traction and labor market conditions have improved modestly," the FOMC statement also said.

Initial Jobless Claims for last week were 350K versus estimates of 335K and 336K the prior week. Continuing Claims were 2883K versus estimates of 2880K and 2878K prior. Claims began to fluctuate last month because of disruptions from hurricanes, with figures ranging from 317,000 to 360,000 since the first storm, Charley, struck Florida on Aug. 13, Bloomberg reported. Last week's number is close to the 344,000 average for the year and consistent with increased hiring as demand recovers from a mid-year lull, economists said. "The September numbers may be understating actual hiring demand," said Mat Johnson, chief economist at ThinkEquity Partners.

Leading Indicators for August fell .3% versus estimates of a .2% decline and a .3% fall in July. The index of coincident indicators, a gauge of current economic conditions, rose .2% for a second month. The index tracks payrolls, incomes, sales and production, Bloomberg reported. "The economy has moderated slightly, but is still very much at positive levels," said John McConnell, chief executive of Worthington Industries. "I don't think there will be long-term inflationary pressures that will disrupt growth in the economy." Worthington shapes steel for automakers.

Durable Goods Orders for August fell .5% versus estimates of a .3% fall and an upwardly revised 1.8% increase in July. Durable Goods Less Transportation for August rose 2.3% versus estimates of a .8% rise and no change in July. The increase excluding transportation equipment was led by orders for metals, computers and communications equipment. The numbers suggest the U.S. manufacturing economy gained strength last month. "The basic message is that most manufacturing industries are currently faring quite well," said Ken Mayland, president of ClearView Economics. "These numbers are begging for the employment of more production workers." Lehman Brothers raised its forecast for economic growth in the third quarter to 4% at an annual rate from 3.3%. The U.S. economy is projected to expand 4.3% this year, the most since the height of the stock market bubble in 1999, Bloomberg reported.

Existing Home Sales for August were 6.54M versus estimates of 6.63M and 6.72M in July. "Sales are down a bit due to higher interest rates," said David Lereah, the National Association of Realtors' chief economist. However, mortgage rates are now falling as inflation expectations diminish, Bloomberg reported. The average rate on a 30-year fixed mortgage fell to 5.7% this week from 6.25% in June, according to Freddie Mac. The median selling price of an existing home in the U.S. was $190,100 last month, up 7.3% from a year ago. As well, 81% of consumers surveyed by the Univ. of Mich. this month said it was a good time to buy a home, up from 77% in August, Bloomberg reported.

Bottom Line: Overall, last week's economic data were mixed. Measures of the health of the housing market remain very strong, but show deceleration from all-time record high levels. However, the recent decline in mortgage rates may reignite the housing market towards year-end. While I do not think it was necessary for the Fed to raise rates last week or maintain their "measured pace of increases" language, I do understand why they are doing this. I believe it is to have ammunition, in the form of rate-cuts, in case of an emergency situation. Moreover, the Fed Funds rate is still so low that the increases aren't negatively impacting business activity to any extent. It also sends the message that they are being vigilant with respect to inflation, thus resulting in diminished inflation expectations and falling long-term interest rates. The hurricanes over the last few weeks likely affected the leading indicators negatively and continue to disrupt jobless claims. However, rebuilding efforts should boost these measures during the fourth quarter. The Durable Goods report was very positive and also bodes well for future economic growth.

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