Economic Week in Review

ECRI Weekly Leading Index 131.70 -.60%

Advance Retail Sales for August fell .3% versus estimates of a .1% decline and a .8% increase in July. Retail Sales Less Autos for August rose .2% versus estimates of a .2% increase and a .3% gain in July. "The August results show a decidedly mixed sales pattern but suggest that consumer spending is emerging from the second quarter "soft patch," said Parul Jain, deputy chief economist at Nomura Securities. "There was a shift in the Labor Day period and that threw us off a little bit," said Terry Lundgren, CEO of Federated. "I'm still optimistic about the fourth quarter." Hurricane Frances, which battered Florida for three days during the Labor Day weekend, reduced profit at the Cincinnati-based retailer, which owns Macy's and Bloomingdale's.

Empire Manufacturing for September rose to 28.3 versus estimates of 20.0 and a reading of 13.2 in August. The gain was the largest since June of last year. Readings above 0 indicate expansion. The employment component of the index rose to the highest level in four months as more factories added workers to meet demand. Production has been spurred by corporate replacement of aging equipment and additions to inventories that are close to a record low relative to sales, Bloomberg said. "The manufacturing expansion is continuing to move forward at a decent pace," said Ian Morris, chief U.S. economist at HSBC Securities. "The jump in the index is consistent with booming manufacturing output growth."

Industrial Production for August rose .1% versus estimates of a .5% increase and a .6% gain in July. Business inventories rose .9% in July versus estimates of a .8% gain and a 1.1% increase in June. Capacity Utilization for August was 77.3% versus estimates of 77.4% and 77.3% in July. "This report was a lot stronger than the headline number suggests, because it was weighed down by utility output," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez. Electric and gas utility production "fell significantly," as the average temperature for August was the seventh-coolest since record-keeping began in 1895, Bloomberg reported.

The Consumer Price Index for August rose .1% versus estimates of a .1% increase and a .1% decline in July. CPI Ex Food & Energy for August rose .1% versus estimates of a .2% increase and a .1% gain in July. Prices for new automobiles fell .3%, airfares plunged 3.7%, gasoline prices dropped 1.4%, prices for dairy products fell 1.8% and clothing prices declined .2%, Bloomberg said. Federal Reserve Chairman Greenspan said in congressional testimony last week that inflation expectations have eased, Bloomberg reported.

Initial Jobless Claims for last week were 333K versus estimates of 340K and 317K the prior week. Continuing Claims were 2882K versus estimates of 2880K and 2885K prior. For the year, initial filings have averaged almost 344K, down from 402K in 2003, Bloomberg said. "The job market is improving and companies are beginning to ramp up hiring again," said Lynn Reaser, chief economist at Banc of America Capital. Brad Anderson, CEO of Best Buy, said he expects job growth will contribute to improved sales in the Christmas shopping season, Bloomberg reported. "There is much reason for optimism as unemployment rates currently are lower than they were a year ago and consumer confidence levels are substantially improved." Manpower Inc. found in a survey of employers that 28% planned to add workers from October through December, compared with 22% in last year's fourth quarter. Finally, a poll by Careerbuilder.com found 49% of hiring managers plan to increase payrolls in the final three months of this year, Bloomberg said.

The Philly Fed came in at 13.4 in September versus estimates of 25.0 and 28.5 in August. Even with the decline in the general index, measures for new orders and employment improved, indicating continued expansion as manufacturing helps pull the U.S. economy out of a mid-year lull, Bloomberg said. "The components of this survey are more positive," said Chris Rupkey, senior economist at Bank of Tokyo Mitsubishi. The general index may have fallen for a variety of reasons, including concerns over terrorism or the impact of the Florida hurricanes on demand, economists said. "It's more significant that both the Philly Fed and Empire State manufacturing surveys reported higher orders and employment this month, which suggests there's really not much of a slowdown going on and that we can anticipate a rise in the overall index next month," said David Sloan, senior economist at 4Cast.

The University of Michigan Consumer Confidence Index for September was 95.8 versus estimates of 96.7 and 95.9 in August. The measure has held above 95 for the last four months, the longest such string since the stock market bubble burst and the economy began to plunge into recession in 2000, Bloomberg reported. The expectations component of the index, based on optimism about the next one to five years, increased to 89.4 from 88.2 last month, Bloomberg said. The university's sentiment index averaged 93.8 in the six months leading up to the 1996 presidential election. "Just how optimistic or pessimistic consumers feel seems to help determine if the incumbent stays or goes," said Neal Soss, chief economist at CSFB.

Bottom Line: Overall, last week's economic data were positive, notwithstanding some disappointment with a couple of the headline numbers. Retail Sales were pretty good considering the very bad weather in some parts of the country. Manufacturing appears to be accelerating after a pause as measures of new orders and employment showed considerable strength. Long-term interest rates fell again last week as another measure of inflation, the Consumer Price Index, showed decelerating inflation. "Soaring inflation" had been one of the main arguments of the Bears and perpetuated in the mainstream press. This myth should now be dispelled as inflation is clearly set to rise less than its 41-year average of 3.0% this year. Historically, mild inflation has benefited stock prices as companies regain some pricing power, boosting profits. Recent employment surveys have shown improvement and point toward even better conditions in the fourth quarter. A better job market, stronger economic growth, a rising stock market, diminishing domestic terrorism fears, an end to the bitter political rhetoric and falling energy prices should spur consumer sentiment over the next several months.