Empire Manufacturing for May fell to -11.1 versus estimates of 11.7 and a reading of 2.0 in April. This is the first contraction since 2003. "The survey is much weaker than we expected, and it supports our view that the soft patch is not over," said Ian Shepherdson, chief economist at High Frequency Economics. Stephen Stanley, chief economist at RBS Greenwich Capital, took the report in stride. "With ample signs of a revival of economic activity in recent weeks, these numbers do not worry me much," Stanley said. The six-months index for orders actually rose to 45.3 from 34.3, Bloomberg reported. As well, the gauge of prices manufacturers paid for materials fell to 42 from 43.1. Finally, the index of hiring expectations over the next six months rose to 22.1 this month from 21.5 in April, Bloomberg reported.
Net Foreign Security Purchases for March fell to $45.7B versus estimates of $70.0B and $84.1B in February. The details may show less potential harm to the dollar than suggested by the total, Bloomberg said. Sean Callow, a currency strategist at IDEAGlobal, noted that demand by private investors for US Treasuries rose by a net $42.9 billion, an increase of 35%. "This resilience in private sector demand for US Treasuries is way above what is needed to finance the current-account deficit," Callow said.
The NAHB Housing Market Index for May rose to 70 versus estimates of 69 and a reading of 67 in April. The gauge of US homebuilder optimism rebounded in May as mortgage rates near record lows and increased job creation fueled housing demand, Bloomberg reported. "With unsold inventories in good shape, housing starts should be solid in coming months," said David Seiders, the association's chief economist. All three components of the index rose. The group's gauge of buyer traffic increased to 53 from 50. The current sales measure rose to 76 from 73, and sales expectations for the next six months increased to 77 from 76, Bloomberg reported.
The Producer Price Index for April rose .6% versus estimates of a .4% increase and a .7% gain in March. The PPI Ex Food & Energy for April rose .3% versus estimates of a .2% increase and a .1% gain in March. US wholesale prices rose more than forecast in April, led by higher costs for gasoline, cigarettes and new vehicles, Bloomberg reported. The data showed raw materials prices are starting to slow, Bloomberg said. "My sense of it is that commodity price pressures have substantially disappeared," said William Poole, president of the St. Louis Federal Reserve. "I'm not relaxed about inflation, but I don't think there's reason for deep concern or worry," he said.
Housing Starts for April rose to 2038K versus estimates of 2000K and 1836K in March. Building Permits for April rose to 2129K versus estimates of 2043K and 2021K in March. US housing starts rebounded more than expected in April as mortgage rates near historic lows and rising job growth spurred home sales, Bloomberg said. Last month's figures are consistent with forecasts that this year may be the best for construction since 1978, and a jump in building permits to almost a 22-year high supports that outlook, Bloomberg said. "We can count on housing to be an engine of growth for the first half and possibly the second half," said Nariman Behravesh, chief economist at Global Insight. Housing units authorized but not started rose to a 19-year high of 224,100 in April, up 22% from a year earlier, Bloomberg reported.
Industrial Production for April fell .2% versus estimates of a .2% increase and a .1% gain in March. Capacity Utilization for April fell to 79.2% versus estimates of 79.5% and 79.4% in March. Excluding autos, manufacturing production rose, and with retail sales accelerating and energy prices retreating, the slowdown isn't likely to last much longer, economists said. "Manufacturing has been weighed down in the last couple of months by the auto sector as Detroit goes through an inventory correction," said Joshua Shapiro, chief economist at Maria Fiorini Ramirez. GM plans to cut output 10% this quarter compared with the same period last year and Ford is reducing it 4.8%, the No. 1 and No. 2 US automakers have said, Bloomberg reported. Outside of autos, manufacturing production picked up, rising .4% after an unchanged reading the prior month, Bloomberg said. Factories expect to invest 9.8% more in new capital equipment this year, up from a 1.6% increase projected in December, according to the results of a survey issued last week by the Institute for Supply Management.
The Consumer Price Index for April rose .5% versus estimates of a .4% increase and a .6% gain in March. The CPI Ex Food & Energy for April was unchanged versus estimates of a .2% increase and a .4% gain in March. Core prices failed to rise for the first time since November 2003. Prices for hotel stays, new autos and clothing actually fell. Energy prices rose 4.5% in April, the largest monthly gain since March 2003, yet the CPI still decelerated from the prior month. "Pipeline price pressures are becoming less intense," said Bruce Kasman, head of economic research at JP Morgan Chase. "This should help temper retail goods inflation." "We have reached the peak of the upward surprises on inflation," said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi.
Initial Jobless Claims for last week fell to 321K versus estimates of 330K and 341K the prior week. Continuing Claims rose to 2601K versus estimates of 2583K and 2596K prior. New claims have averaged about 325,000 in the first four months of the year, down from 350,000 a year ago. The four-week moving-average of claims increased to 329,750 from 324,250 the prior week. The four-week moving-average of continuing claims dropped to 2.58M, a four-year low. The insured unemployment rate, which tends to move with the US unemployment rate, held at a four-year low of 2.0%. "There are no reasons to be concerned about the labor market," said Tim Rogers, chief economist at Briefing.com.
Leading Indicators for April fell .2% versus estimates of a .2% decline and a .6% fall in March. The Leading Economic Indicators Index fell for a fourth straight month in April as high gas prices weighed on consumer sentiment. March’s number was revised down to a .6% decline, the largest decrease since September 20001. "There have been a number of signs of a loss of momentum," said Roger Kubarych, a senior economist at HVB America.
Philadelphia Fed. for May fell to 7.3 versus estimates of 17.3 and a reading of 25.3 in April. This was the biggest monthly drop since January 2001. Factory demand is moderating as growth in business spending eases and companies sell from inventories that piled up during the first three months of 2005, Bloomberg said. "There's no longer the need to rebuild inventories, and demand overall is growing at a more moderated pace. "The weakness in the auto sector is also feeding through to other manufacturers," said David Sloan, senior economist at 4Cast Inc.
BOTTOM LINE: Overall, last week's economic data were slightly negative. Manufacturing activity has slowed significantly from vigorous levels to below-average rates. This is mainly a result of the 1Q build in inventories. Companies, especially autos, are now decreasing production to work off these stockpiles. As well, some commodity-related industries are beginning to decrease production as prices fall. I expect factory production to accelerate during the third quarter as inventories fall and demand strengthens. Increasing demand for US Treasuries by the private sector is a positive and I continue to believe fears of foreign central bank "diversification" are way overblown, especially with the recent US dollar strength. The housing market remains very strong despite the attempts by many to paint a negative picture. I do not believe there is a nationwide bubble in housing. However, price gains will moderate substantially over the next few years. This has already begun. The median existing home price is only up about 2.0% since June of last year. Inflation, which is rising around average rates right now, is set to decelerate through year-end. I expect many bears to begin switching their arguments to deflation from inflation during this period. The labor market will likely show some weakness over the coming months due to slowing manufacturing activity. However, I expect a rebound back to modest levels shortly thereafter. I continue to believe US GDP growth is slowing temporarily to around 2.5% this quarter. Low interest rates, an end to the inventory correction, falling commodity prices, a booming housing market, improving consumer sentiment, rising stock prices, improving trade/budget deficits and a firmer US dollar should propel growth back to average levels during the third quarter. Finally, the ECRI Weekly Leading Index fell .89% to 134.40 and is still forecasting slowing, but healthy levels of economic activity.