Consumer Confidence for March fell to 102.4 versus estimates of 103.0 and a reading of 104.4 in February. Economists said gasoline, which reached an inflation unadjusted all-time high of $2.19/gallon in the past week, dimmed consumer's outlook. "The downtrend in consumer confidence could cause a new soft spot in the economy if gasoline prices continue this sharp run-up," said Christopher Rupkey, senior financial economist at the Bank of Tokyo-Mitsubishi. March was the fourth month with a reading higher than 100, compared with an average of 96.1 for all of last year, when the economy grew at the fastest pace since before the bubble burst in 1999, Bloomberg said. "The drop in confidence was not large and the level is still high, so we should expect consumer spending to continue at a decent level," said Joel Naroff, president of Naroff Economic Advisors. A cooler pace of spending may put less pressure on inflation, which may ease concerns among bond investors that the Fed will step up its pace of interest-rate increases, Naroff said. As well, Nobel Laureate Joseph Stiglitz, an economic professor at Columbia University, said "I'm not very worried about inflation at this point." Finally, the proportion of consumers who saw jobs as plentiful rose to 21.3%, the highest since September 2001, Bloomberg reported.
Final 4Q GDP rose 3.8% versus estimates of a 4.0% increase and a 3.8% prior estimate. This capped the best year of growth since 1999, Bloomberg said. Final 4Q GDP Price Deflator rose 2.3% versus estimates of a 2.1% increase and a prior gain of 2.1%. Final 4Q Personal Consumption rose 4.2% versus estimates of a 4.3% rise and a 4.2% prior estimate. Consumer and corporate spending are helping keep growth above the 3.3% annual average of the past decade, even as oil and gas prices rise, Bloomberg said. "Consumers are providing good support to the economy and businesses are spending actively as well," said Michael Moran, chief economist at Daiwa Securities America. The Core PCE Index, the Fed's favorite inflation measure, rose 1.7% during the fourth quarter, Bloomberg reported. "We're dealing with relatively low levels of inflation," said Edward McKelvey, senior US economist at Goldman Sachs. The US economy outpaced other members of the Group of Seven industrialized nations last year, expanding 3.8% in the fourth quarter. The economies of Canada and the UK both grew 2.9%. In Germany, growth was .6%, while Japan's economy expanded .8%, Bloomberg reported. Last year's consumer spending growth of 3.8% was the most since 2000 and spending is forecast to rise an average 3.5% this year, Bloomberg said. Finally, spending on equipment and software during the last 6 months of 2004 grew at the fastest pace since gains totaling 39.6% in the two quarters ending in September 1997, Bloomberg reported.
Personal Income for February rose .3% versus estimates of a .4% increase and a 2.5% decline in January. Personal Spending for February rose .5% versus estimates of a .5% increase and a .1% gain in January. The PCE Core for February rose 1.6% versus estimates of a 1.6% increase and a 1.6% gain in January. US personal spending rose in February for an eighth straight month, as job growth helped propel income and sales, Bloomberg said. "Wage and salary growth is rising at a moderate pace, reflecting the recent gains in employment, hours and earnings," said Steven Wood, chief economist at Insight Economics. "These figures tend to support the Fed's measured approach in removing accommodation, and acts to calm fears that inflation is accelerating too quickly," said Ian Morris, chief US economist at HSBC. Retailers including Wal-Mart Stores and Kohl's posted their biggest sales gain in February in nine months. Same-store sales rose 4.9% from a year earlier, the International Council of Shopping Centers said March 3, Bloomberg reported.
The Chicago Purchasing Manager Index for March rose to 69.2 versus estimates of 60.5 and a reading of 62.7 in February. Chicago-area business unexpectedly expanded in March at the fastest pace in more than 16 years, and a measure of regional hiring jumped to the highest in more than two decades, Bloomberg reported. "It is encouraging and does bode well for the future trend in manufacturing activity we'll see later this year," said Anthony Chan, senior US economist at JPMorgan Fleming Asset Management. The index of prices paid by companies for materials and supplies fell for the fourth consecutive month to 68.2, the lowest in a year, Bloomberg reported. The prices paid index remains well below the 88.9 level reached in November 2004, Bloomberg said.
Factory Orders for February rose .2% versus estimates of a .5% increase and a 0.0% change in January. Factory demand for equipment and consumer goods may be starting to cool as companies face higher energy prices and borrowing costs, Bloomberg said. "The manufacturing sector hit a temporary bump in the road," said Anthony Chan, senior economist at JPMorgan Fleming Asset Management. "It isn't positive month after month but for the year as a whole it seems to have good positive momentum," Chan said. Orders for capital goods excluding aircraft, a proxy for future business investment, so far this year are still 16.3% higher than they were in the same two months last year, Bloomberg reported.
The Unemployment Rate for March fell to 5.2% versus estimates of 5.3% and a 5.4% rate in February. Average Hourly Earnings for March rose .3% versus estimates of a .2% rise and a .1% increase in February. The Change in Non-farm Payrolls for March was 110K versus estimates of 213K and 243K in February. The Change in Manufacturing Payrolls for March was -8K versus estimates of 8K and 15K in February. Businesses had to pay more for crude oil and other raw materials, diverting cash that could otherwise have been used to hire more workers, Bloomberg said. The report may help curb speculation that the Fed will need to raise interest rates at a faster pace, said Susan Phillips, dean of the business school at George Washington Univ. and a former Fed governor. "The Fed will still go with raising the fed funds rate by another 25 basis-points at its May meeting, but this suggests it can hold the 'measured-pace' language for a while longer," said former Fed governor Lyly Gramley. An economist at the Federal Reserve Bank of Atlanta, in an article published in the bank's quarterly review, said changes in the labor force participation rate suggest the US only needs to add about 93,000 jobs a month, less than the 150,000 often cited, to lower the unemployment rate, Bloomberg reported. "Consumer spending and business investment would now be something that we have to be cautious about," said Tim Rogers, chief economist at Briefing.com in Boston. "That takes away all the fear of more aggressive tightening" by the Fed, Rogers said.
The Final Univ. of Mich. Consumer Confidence for March fell to 92.6 versus estimates of 92.7 and prior estimate of 92.9. The index has averaged a reading of 88.1 since 1978. "It seems that despite the improvement in labor market conditions the consumer is worried about the rising gasoline prices," said Elisabeth Denison, a US economist at Dresdner Kleinwort Wasserstein. The university's index of current conditions, which reflects Americans' perceptions of their financial situation and whether it's a good time to make big purchases, fell to 107.3 from 109.2, Bloomberg reported. "The economy appears to have started 2005 with more momentum than anticipated," said Drew Matus, senior economist at Lehman Brothers. "But the growth kick is likely to be temporary. Activity should start to cool this summer," Matus said.
Construction Spending for February rose .4% versus estimates of a .6% increase and a .6% gain in January. The stretch of increases is the longest since records began in 1993, Bloomberg said. An expected slowdown in residential construction, which was to be offset by more commercial and government projects, has yet to materialize, Bloomberg reported. "Higher mortgage rates will cause housing to level off as we move through the year. At the same time, private non-residential construction is likely to become more active as vacancy rates continue to decline and public construction continues to be relatively well funded by higher tax revenues," said Lynn Reaser, chief economist at Banc of America Capital Management.
ISM Manufacturing for March fell to 55.2 versus estimates of 55.0 and a reading of 55.3 in February. The index averaged 60.5 last year, the highest annual average since 1973, Bloomberg said. ISM Prices Paid for March rose to 73.0 versus estimates of 66.0 and a reading of 65.5 in February. The Prices Paid Index is still well below the reading of 88.0 in March of 2004, Bloomberg said. "Nationwide, manufacturing activity grew at a moderate pace in March, albeit slower than in late 2003 or for 2004," said Steven Wood, president of Insight Economics. The factory institute's employment index dropped to 53.3 from 57.4 and the group's new orders gauge rose to 57.1 from 55.8 in February, Bloomberg reported.
ISM Non-Manufacturing for March rose to 63.1 versus estimates of 59.0 and a reading of 59.8 in February. The ISM Non-Manufacturing report had been scheduled for release on April 5, but was inadvertently sent early by Business Wire, said a spokesman for the Institute. The increase was the fifth in six months, Bloomberg said.
Total Vehicle Sales for March rose to 16.8M versus estimates of 16.7M and 16.3M in February. Domestic Vehicle Sales for March rose to 13.5M versus estimates of 13.2M and 13.0M in February. US sales of cars and light trucks rose 4.5% in March, paced by General Motor's first increase this year and gains at Toyota Motor Corp., Nissan Motor Co. and DaimlerChrysler AG, Bloomberg reported. GM sold more pickup trucks last month than in any March since 1978 after it added rebates of $1,000 on models sitting unsold at dealers more than four months, Bloomberg said. "This is a much-needed positive for the industry overall, and GM in particular," said Rebecca Lindland, an analyst at Lexington, Massachusetts-based consulting firm Global Insight. US auto industry sales of sport-utility vehicles, trucks and minivans dropped in the first two months of this year as fuel prices rose. Even with their gains, GM and DaimlerChrysler's Chrysler unit still lost market share to Asian automakers, which took 36.2% of the US auto sales in March, up from 34.1% a year earlier, Bloomberg reported.
BOTTOM LINE: Overall, last week's economic data were modestly positive. The fact that Consumer Confidence only fell slightly is remarkable considering the media's and bears' attempts to spin almost everything in a negative light, high-profile acts of violence around the country, Terri Schiavo's Case, the Social Security debate, higher energy prices and lower stock prices. US GDP growth, the strongest of all industrialized nations, will likely slow from around 4.0% this quarter to a more sustainable 3.0% over the next couple of quarters. While the employment report was a bit disappointing, it was positive for the overall health of the US economy and stock market. Modest improvements of around 125,000-175,000 jobs would be optimal to keep unit labor costs low, while allowing the unemployment rate to improve slowly, thus holding inflation in check. Measures of inflation were mixed last week, which is a big positive considering the steep rise in commodity prices so far this year. I continue to expect inflation readings to begin to decelerate again during the second half of the year. Consumer prices for 2005 will likely rise around the 3.0% average of the last 40 years and below the 3.3% increase in 2004. The Fed's favorite inflation gauge, the PCE Core Index, will only rise around 1.75% for the year. I continue to believe that with the US dollar strengthening, foreign purchases of US assets remaining strong, the CRB Index turning lower, inflation only near average rates, global economic growth slowing and significant problems at a few major US companies, it is highly unlikely the Fed will actually raise rates 50 basis points at any meeting in the foreseeable future. Measures of manufacturing activity were mixed, however the exceptional Chicago Purchasing Manager's report bodes well for future activity. Construction will likely slow from very strong levels to more sustainable levels over the coming quarters. However, relatively low long-term interest rates will prevent any substantial decline. The fact that GM had the best March for pickups since 1978 may be evidence that higher gas prices continue to be offset by other positive factors. I am watching Wal-Mart's weekly sales figures closely. Their target market should show the first signs of any negative impact on consumer spending from higher gas prices. Finally, the ECRI Weekly Leading Index remained unchanged at 135.0, near cycle highs.
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