Economic Week in Review

ECRI Weekly Leading Index 131.10 -.23%

Personal Income for July rose .1% versus estimates of a .5% rise and a .2% increase in June. Personal Spending for July rose .8% versus estimates of a .7% increase and an upwardly revised .2% decline in June. The PCE Core Index rose 1.5% year-over-year versus estimates of a 1.5% increase and a prior estimate of 1.5%. "With the upward revisions there really wasn't any significant slowing in spending over the last couple of months," said Michael Englund at Action Economics. "We are going to see some pretty solid spending numbers." Englund is forecasting a 3% to 3.5% annualized increase in spending this quarter, Bloomberg reported. Wages and supplements to salaries increased 5.3% at an annual rate in the second quarter, up from 5.2% in the first three months of the year, Bloomberg said. Incomes in July were restrained by a decline in government transfer receipts because of a reduction in the federal matching rate of Medicaid reimbursements. Those payments had been boosted by last year's tax cuts, Bloomberg reported.

The Chicago Purchasing Manager Index for August fell to 57.3 versus estimates of 60.0 and a reading of 64.7 in July. "After growing briskly earlier in the year, manufacturing activity has slowed recently but was still expanding solidly," said Steven Wood, chief economist at Insight Economics. The Chicago purchasers' employment index rose to 51.1 from 45.6 in July, Bloomberg reported. The group's index of prices paid for raw materials surged to 86.6 from 77.6 in July, Bloomberg said.

Consumer Confidence for August fell to 98.2 versus estimates of 103.5 and a reading of 105.7 in July. Consumer confidence in the U.S. economy fell from a 2-year high as job growth slowed and oil prices reached a record, Bloomberg said. "The August reading still is high," the Conference Board's Smith said. "Peoples' assessment of the job situation is August is still a lot better than it was in April or May," said Stephen Stanley, chief economist at RBS Greenwich Capital Markets. Moreover, the survey was completed Aug. 24, before the recent decline in oil prices, Bloomberg reported. Retail gasoline prices have averaged $1.92 a gallon this month, down from $1.95 in July, according to figures from the U.S. Energy Department.

Construction Spending for July rose .4% to a record annual rate of $997.2 billion versus estimates of .4% and 0.0% in June. The rise was the fifth in six months, Bloomberg said. More favorable weather conditions, increased transportation expenditures and lower mortgage rates contributed to the increase in July, Bloomberg reported. "Interest rates are low, inflation is relatively low, the economy is growing at a healthy clip and we've had highly accommodative fiscal and monetary policies for the past three years – all of which adds up to solid growth within the construction industry," said Michael Englund.

ISM Manufacturing for August fell to 59.0 versus estimates of 60.0 and a reading of 62.0 in July. ISM Prices Paid for August rose to 81.5 versus estimates of 79.0 and a reading of 77.0 in July. The manufacturing index has shown expansion, marked by readings higher than 50, since June 2003, Bloomberg said. "The factory sector is just cooling from super strong to solid," said James O'Sullivan, a senior economist at UBS Securities.

Total Vehicle Sales for August were 16.6 million versus estimates of 16.8 million and 17.3 million in July. Domestic Vehicle Sales for August were 13.5 million versus estimates of 13.6 million and 14.1 million in July. Fuel prices have prospective buyers "evaluating whether they should move down to a car or a smaller SUV and that takes time," Global Insight forecaster Rebecca Lindland said. Automakers increased the amount they spent on incentives last month to $4,203 from $4,027 in July and almost unchanged from August 2003, Bloomberg reported.

Factory Orders for July rose 1.3% versus estimates of a 1.1% gain and an upwardly revised 1.2% increase in June. The increase was the most in four months as orders increased from commercial aircraft, appliances and business equipment, Bloomberg said. Rising profits and demand are giving companies the cash to replace aging equipment. Moreover, unfilled orders accelerated in July, suggesting production will pick up and boost the economy in the next few months, Bloomberg reported. "The strong performance of orders, shipments and backlogs indicates that the industrial sector is moving forward and concerns about the economy's soft spot may have been overstated," said Lynn Reaser, chief economist at Banc of America Capital Management.

The Unemployment rate for August fell to 5.4% versus estimates of 5.5% and 5.5% in July. Average Hourly Earnings rose .3% in August versus estimates of a .2% increase and an upwardly revised .4% gain in July. The Change in Non-farm Payrolls for August was 144,000 versus estimates of 150,000 and an upwardly revised increase of 73K in July. The Change in Manufacturing Payrolls for August was 22,000 versus estimates of 15,000 and 6,000 in July. The unemployment rate is now at its lowest level since October 2001 and below the average of the 1970's, 1980's and 1990's, Bloomberg reported. "It's a very reassuring report – one that indicates the economy is doing better in the third quarter than it did in the second," said Lyle Gramley, a former Fed governor that is now an adviser at Schwab Soundview. The economy has now added 1.4 million jobs this year, Bloomberg reported. Business has "been very consistent with a recovering economy, and we don't see any sign that things are slowing down at all," said William Zollars, CEO of Yellow Roadway, the biggest U.S. trucking company. As well, CEOs are more optimistic about the economy than they have been for two years, anticipating greater sales and hiring through the rest of this year and into 2005, according to a recently released survey by the Business Roundtable. 89% of executives polled predicted sales would rise over the next six months and 40% expected payrolls to increase, Bloomberg said.

ISM Non-Manufacturing for August fell to 58.2 versus estimates of 62.0 and a reading of 64.8 in July. However, a measure of employment rose, while the gauge of price increases fell, Bloomberg reported. "I think you have to say from our numbers this month, the soft patch was still with us in August," Ralph Kauffman, chairman of the non-manufacturing committee at the institute said. "People are going back to work and they're buying office supplies," Ron Sargent, president and CEO of Staples said. "We're seeing good momentum in every single part of the business. We're pretty upbeat and bullish about the economy in the second half of the year."

Bottom Line: Overall, last week's economic data were mixed. The bounce-back in employment growth is a very good sign. Several million jobs were likely created during the economic bubble in the later part of the 90's by hyped-up companies with flawed or fraudulent business models. While current employment growth is mild by mania standards, it is nonetheless solid and created by profitable companies with sustainable business models using much less "creative" accounting. Moreover, the unemployment rate is low by historical measures, notwithstanding the media's attempts to paint a negative picture of the job market. As well, multiple surveys point to continuing improvement in the labor market throughout the year. This will boost incomes which will result in increased confidence and sustain spending. The recent plunge in natural gas prices(-31.3%) and declines in gasoline(-10.3%) and oil prices(-10.1%) should also boost confidence and increase spending. The PCE Core Index, Greenspan's favorite inflation gauge, remained unchanged from the prior month and should decelerate in the future with declining commodity prices. As well, long-term interest rates, the best gauge of inflationary fears, remain very low by historic standards. Construction spending bounced back sharply in July after record setting bad weather in June for most of the country. Hurricanes Charley and Frances will result in strong construction spending throughout the remainder of the year. While the ISM readings on manufacturing and services continue to show deceleration from record-setting levels, I view this as temporary and expect them to follow factory activity and re-accelerate in the fourth quarter. I continue to expect energy prices to fall through year-end as terrorism fears diminish and demand slows from Asia as a result of decelerating Chinese economic growth. Furthermore, I continue to expect a sharp acceleration in U.S. economic growth during the fourth quarter. Diminishing terrorism fears, an end to the extreme negativity surrounding the U.S. election, better weather, companies purchasing equipment before tax incentives expire at year-end, lower energy prices, rebuilding in Florida and lower interest rates should boost economic growth to around 5% during the fourth quarter. This will likely result in a very large number of corporate earnings surprises as companies beat recently lowered estimates.