Saturday, October 30, 2004

Economic Week in Review

ECRI Weekly Leading Index 130.60 -.76%

Existing Home Sales for September rose to 6.75M, at the third-highest pace on record, versus estimates of 6.51M and 6.55M in August. The West and Northeast were the two strongest regions of the country. The three hurricanes that pummeled Florida kept U.S. sales from rising further in the South, the National Association of Realtors said. David Lereah, chief economist for the real-estate association, said September re-sales were down 20% to 30% in metropolitan areas of Florida that were affected by the hurricanes. Those sales should show up in the October report. The association continues to forecast that 2004 will be the best year ever for sales, Bloomberg said. "Real estate has been and will continue to be a pillar of the economy," said James Gillespie, president of Coldwell Banker Real Estate. The inventory of houses for sale fell to 4.4 months' supply. 69% of U.S. households owned their residence as of Sept.30, close to the all-time record of 69.2% set mid-year.

The Conference Board's Consumer Confidence reading for October fell to 92.8 versus estimates of 94.0 and a reading of 96.7 in September. The percentage of Americans that saw jobs as hard to get fell to 27.8%, Bloomberg reported. As well, the survey found the percentage of consumers planning to buy a car rose to 7.4% from 6.3% last month. While confidence has fallen in recent months, consumers' actions suggest confidence is strong as evidenced by near-record home sales and the highest auto sales in three years last month, Bloomberg said.

Durable Goods Orders for September rose .2% versus estimates of a .5% rise and a .6% fall in August. Durable Goods Less Transportation for September rose 1.7% versus estimates of a .3% increase and a 2.8% gain in August. Business investment in new equipment is accelerating this year amid record profits and low interest rates, Bloomberg reported. "The general economic improvement and the drive for more productivity is fueling demand for capital goods," said Stuart Hoffman, chief economist at PNC Financial. Moreover, bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, rose 2.6% last month, the most since March. Orders for computers and electronic products rose 9.3% last month, the most since June 2000, Bloomberg reported. Communications equipment orders rocketed 35.6% higher. "The recovery is very broad-based and across all sectors we serve and all regions globally," said Lynn McPheeters, the CFO of Caterpillar Inc. Finally, some companies are replacing outdated equipment to take advantage of tax incentives that are set to expire at the end of the year, Bloomberg reported.

New Home Sales rose to 1206K in September, the third highest on record, versus estimates of 1150K and 1165K in August. "It's a remarkable performance," said Ethan Harris, chief economist at Lehman Brothers. Sales of new home this year will reach 1.164 million, surpassing last year's record, Bloomberg reported. "Traffic is up, signups are up and the country is doing extremely well," said Richard Dugas, CEO of Pulte Homes. Pulte, the third-largest homebuilder by stock market value, said earlier in the week its third-quarter profit rose 54% and that the backlog of homes ordered and awaiting delivery rose 23% to 20,400 units. The median price of a new home rose 3% from a year ago. The deceleration in price increases is a result of starter homes, houses priced less than $150,000, accounting for a greater percentage of the total, Bloomberg reported. New home sales in the Midwest rose led gains throughout the country with an increase of 12%, Bloomberg said. Even with Georgia reporting 12.14 inches of rain, the most ever for any September, and Florida experiencing significant rainfall throughout the month, sales rose 2.7% in the South. For the nation, September was the 13th wettest month on record, Bloomberg reported. Finally, the inventory of new homes for sale fell to a 4.1 months supply. "This underscores the very strong underlying sales pace," said Stephen Stanley, chief economist at RBS Greenwich Capital.

Initial Jobless Claims for last week were 350K versus estimates of 335K and 330K the prior week. Continuing Claims were 2823K versus estimates of 2818K and 2785K prior. The less volatile four-week moving-average fell to 343K from 349K. "This indicates that the labor markets remain fundamentally stable," said Steven Wood, President of Insight Economics. For the year so far, initial claims have averaged 344K compared to 402K in 2003, Bloomberg reported. Hiring "appeared to increase modestly," the Fed said in its recent 'beige book' report. Some districts reported "shortages" of skilled manufacturing workers, truck drivers and "upper-level" finance workers, Bloomberg reported. Finally, layoffs involving 50 or more workers are down 17% from the same period last year.

The advance 3Q GDP reading showed 3.7% growth versus estimates of 4.3% and 3.3% during 2Q. Advance 3Q Personal Consumption rose 4.6% versus estimates of 4.6% and a 1.6% rise in 2Q. The advance reading for the GDP Price Deflator rose 1.3% versus estimates of a 1.6% increase and a 3.2% gain in 2Q. The Employment Cost Index rose .9% in 3Q versus estimates of a 1.0% gain and a .9% increase in 2Q. Consumer spending grew at almost triple the pace of the second quarter, business spending rose, and a measure of inflation in the report fell to the lowest rate since 1962, Bloomberg reported.

The Final Univ. of Mich. Consumer Confidence reading for October rose to 91.7 versus estimates of 88.0 and a prior estimate of 87.5. The university's current conditions index, which reflects Americans' perception of their financial situation and whether it's a good time to buy big-ticket items, rose to 104, Bloomberg reported. When the university's sentiment index is greater than its long-term average of 88, the party in office tends to keep the White House, according to a research report issued last month by economist at Credit Suisse First Boston, Bloomberg reported.

The Chicago Purchasing Manager report for October rose to 68.5, the highest level in more than 16 years as orders and hiring increased, versus estimates of 59.0 and a reading of 61.9 in September. Readings higher than 50 mean growth, and October is the 18th month of uninterrupted expansion, Bloomberg said. "Solid gains in factory activity are due primarily to robust capital goods spending as well as spending on consumer durables and exports," said Steven Wood, chief economists at Insight Economics. Investors watch the Chicago report closely for clues about the strength of manufacturing and the overall U.S. economy, Bloomberg said. "The economy's performance in the third quarter was quite robust and the Chicago index suggests that continued into the fourth quarter," said Edward McKelvey, a senior economist at Goldman Sachs. The Chicago index of new orders rose in October to 79.4, the highest in 20 years, from 67.7 in September, Bloomberg reported. The NAPM employment index rose to 54.1, with a reading higher than 50 meaning more companies said they were hiring than firing, Bloomberg said. A gauge of inventories dropped to 51.8 from 64.7. The Federal Reserve Bank of Chicago says its region produces 40% of the nation's motor vehicles, 35% of the nation's steel and almost half of its farm equipment, making the region a major center for U.S. durable goods manufacturing, Bloomberg said.

Bottom Line: Overall, last week's economic data were very positive and bode well for future U.S. economic growth. Home sales remain exceptionally strong and multiple indicators show a high probability of acceleration into year-end. The Bears and pundits have been wrong about the so-called "home bubble" for several years and will continue to be wrong for the foreseeable future. While measures of consumer confidence have declined in recent months, consumers continue to show extraordinary confidence in their financial situation as evidenced by very strong home and auto purchases. Moreover, measures of the intentions of consumers to purchase big-ticket items continue to accelerate. Finally, the intense negativity perpetuated by the media, foreign officials and politicians in hopes of influencing the U.S. election should subside next month which will boost consumer sentiment greatly. Manufacturing activity is rebounding sharply and should continue to accelerate into year-end as companies seek to replace aging equipment before tax incentives expire. This will lead to an accelerated rate of hiring as companies struggle to meet rising production needs. Moreover, many other recent measures of hiring point to an improving labor market over the next couple of months. U.S. economic growth accelerated during the third quarter and should approach an extremely robust 5% during this quarter as hiring improves, production increases, corporate spending accelerates, energy prices drop, consumer spending increases and rebuilding in Florida takes hold. The 3.7% GDP growth during the third quarter was the highest quarterly growth rate for the U.S. economy before an incumbent President seeks re-election in 25 years. Finally, my prediction of 5% growth for the fourth quarter would result in the fastest 6 quarters of U.S. economic growth since the early 1980s.

No comments: