Saturday, November 13, 2004

Economic Week in Review

ECRI Weekly Leading Index 132.30 +.23%

Wholesale Inventories for September rose .5% versus estimates of a .7% increase and a 1.1% gain in August. Wholesalers had enough supplies to last 1.15 months at the sales rate for September, the same as in the prior three months and close to the all-time low of 1.12 in April. "The general expectation among a lot of customers is that inventory levels are much stronger and there's no need to place orders as far in advance, and that may lead to shortages later," said David Bowers, president of the semiconductor business at Nu Horizons Electronic.

The Import Price Index for October rose 1.5% versus estimates of a 1.0% increase and a .5% gain in September. The Commerce Department reported separately that the U.S. trade gap unexpectedly narrowed in September to $51.6 billion as oil imports fell and exports of U.S. goods and services rose to a record, Bloomberg said. Excluding oil, the prices of imported goods showed the biggest drop since August 2003, Bloomberg reported. "It's very challenging, the way it is now, for businesses to raise prices," said Wesley Beal, an economist at financial research firm IDEAglobal.

Initial Jobless Claims for last week were 333K versus estimates of 337K and 331K the prior week. Continuing Claims were 2813K versus estimates of 2800K and 2794K prior. The four-week moving average of claims, a less-volatile indicator, dropped to the lowest level since July, Bloomberg said. With productivity slowing in the third quarter, hiring accelerated last month, suggesting stronger demand will lead to more jobs, Bloomberg reported. "Growth has been very strong and you've probably seen as much productivity gains as you are going to," said Gary Bigg, an economist at Banc of America. "From now on, you are going to have to hire employees to increase your output."

Federal Reserve policy makers raised the benchmark U.S. interest rate for a fourth straight time and restated a plan to carry out further increases at a "measured" pace. The FOMC raised the overnight bank lending rate by a quarter of a point to 2%, saying the labor market improved and the economy is showing "moderate" growth even amid higher oil prices, Bloomberg said. "This shows they're satisfied at the moment that the economy is growing nicely and that inflation is under very good control," said Lyle E. Gramley, former Fed governor and now an adviser at Washington Research Group.

Advance Retail Sales for October rose .2% versus estimates of a .1% increase and a 1.6% rise in September. Retail Sales Less Autos for October rose .9% versus estimates of a .6% increase and a .8% rise in September. "It's a very positive sign for the holiday season," said Tim McGee, chief economist at U.S. Trust Corp. "With job growth picking up and wage and salary gains accelerating, all the pieces are in place for the consumer to keep spending." Spending at clothing and accessory stores jumped 3%, the biggest increase in two years, Bloomberg reported.

The preliminary Univ. of Mich. Consumer Confidence reading for November was 95.5 versus estimates of 93.1 and a reading of 91.7 in October. U.S. consumer confidence rose in early November as President Bush won undisputed re-election, stocks climbed, energy prices fell and job creation surged, Bloomberg reported. The University's current conditions index, which reflects Americans' perception of their finances and whether it's a good time to buy big-ticket items, rose to 106.2 from 104 in October. The expectations index, based on optimism about the next one to five years, rose to 88.7 from 83.8 last month, Bloomberg said.

Business Inventories for September rose .1% versus estimates of a .5% gain and a .7% increase in August. "What we see is very , very little inventory build at our customers, very little build within our own company and our industry, and significant accumulation of inventory at our suppliers," said Roy Vallee, CEO of Avnet. The overall increase in sales at U.S. retailers, wholesalers and manufacturers in September brought the level to $956.8 billion. The inventory-to-sales ratio held at 1.32 months, Bloomberg reported.

Bottom Line: Overall, last week's economic data were positive. Inventories, while falling recently, will likely increase over the next few months as companies anticipate rising demand. This will also help boost U.S. GDP growth. Measures of inflation for October will show a temporary acceleration in inflation, however the recent fall in energy prices bodes well for inflation readings in the intermediate-term. Job creation is accelerating to more typical levels as productivity falls, confidence improves and demand strengthens. The Fed raised rates 25 basis points, as expected, and will likely hike rates another 25 basis points in December as economic growth accelerates and job creation improves. Retail sales should be surprisingly strong during the holiday season as the U.S. consumer is in better shape than is commonly perceived. Furthermore, consumer sentiment is already improving as a result of the election and declining energy prices. Consumer Confidence should reach new highs for this cycle over the next couple of months on improving job prospects, a further decline in energy prices, a rising stock market, less negative political/media rhetoric, improvements in the big picture in Iraq and decelerating inflation readings.

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