Sunday, June 05, 2005

Economic Week in Review

ECRI Weekly Leading Index 132.00 -.60%

Consumer Confidence for May rose to 102.2 versus estimates of 96.1 and a reading of 97.5 in April. US consumer sentiment unexpectedly rose in May for the first time in four months. As well, the present situation component of the index rose to 116.7 from 113.8. The % of consumers who saw jobs as plentiful rose to 22.6% from 20.4% in April. The percentage expecting more jobs to be available six months from now increased to 14.9% from 14.0%. Those expecting fewer jobs fell to 15.9% from 18.4%. The percentage expecting to buy a home in the next six months dropped to 3.5% from 4.1%. However, those expecting to purchase an auto increased to 7.6% from 5.8%. Confidence in New England experienced the greatest regional gain, rising 24.2% to 92.40 from 74.40. "The economic backdrop is pretty solid, and as long as energy prices don't flare up again we may have seen the worst of it" for confidence, said Jonathan Basile, an economist at CSFB. "People really have a lot of income out there and that's why spending has been so strong," said Joseph LaVorgna, chief fixed income economist at Deutsche Bank Securities.

The Chicago Purchasing Manager Index for May fell to 54.1 versus estimates of 61.4 and a reading of 65.6 in April. The Chicago PMI fell in May to the lowest level in almost two years. Readings above 50 indicate growth. The employment component of the index fell to 54.7 from 62.3, while the new orders index declined to 57.9 from 71.0. On the positive side, the prices paid component fell to 54.3 from 66.1. The prices paid index has now plunged by 38.9% since November 30, 2004. "We're transitioning from the early years of a cycle when all businesses are experiencing increases in demand to the middle years where there are ups and downs," said Michael Englund, chief economist at Action Economics.

Construction Spending for April rose .5% versus estimates of a .6% increase and a .6% gain in March. US construction spending rose in April to an all-time record level. Homebuilding gained .6% and accounted for more than half the total. Non-residential construction rose 1.3% in April, the highest since May 2002. Construction of commercial buildings rose 3.8%. Thirty-year mortgage rates have averaged 5.78% this year, near the four-decade low of 5.21% seen in June 2003. The average mortgage rate since the start of 1980 is 9.58%. As well, construction spending has grown in every month starting with February 2004, the longest stretch since comparable records began in 1993. "This suggests building activity will again contribute positively to overall economic growth," said Steven Wood, president of Insight Economics LLC.

ISM Manufacturing for May fell to 51.4 versus estimates of 52.0 and a reading of 53.3 in April. ISM Prices Paid for May fell to 58.0 versus estimates of 67.5 and a reading of 71.0 in April. The pace of US manufacturing growth slowed in May for a sixth straight month. The index is the lowest since June 2003. The new orders gauge of the index fell to 51.7 from 53.7 in April. The production index fell to 54.9 from 56.7. The ISM Prices Paid Index fell to 58.0, the lowest since September 2003, from 71 in April. Prices Paid has now plunged 34.1% since April 30, 2004. The employment component of the index decreased to 48.8 from 52.3 in April. Consumer spending and business investment to update equipment will probably keep manufacturing from slipping much further, economists said. "Businesses have been paring back inventories, and that makes for sluggish growth," said Michael Gregory, a senior economist at BMO Nesbitt Burns.

Total Vehicle Sales for May fell to 16.7M versus estimates of 16.7M and 17.5M in April. Domestic Vehicle Sales for May fell to 13.3M versus estimates of 13.5M and 13.9M in April. General Motors, Ford and Honda said US sales last month fell more than 11% from May 2004, the second-strongest month for sales last year, Bloomberg reported. Toyota Motor's sales declined .5% while Nissan Motor sales rose. Ford also announced it would trim North American production 2.3% in the third quarter, Bloomberg said. GM said it will try to boost sales by offering its employee-discount program to all customers through July 5. "Its going to be more of the same with domestics continuing to lose ground and the Asians continuing to gain ground," said Frank Ursomarso, a Wilmington, Delaware, auto dealer.

Final 1Q Non-farm Productivity rose 2.9% versus estimates of 3.0% and a prior estimate of 2.6%. Final 1Q Unit Labor Costs rose 3.3% versus estimates of 2.2% and a 2.2% prior estimate. Productivity rose in the first quarter at the fastest pace in 9 months. Productivity gains exceeded 4.0% in each of the last three years. At no time in history had there even been back-to-back increases greater than 4.0%. The year-over-year increase in unit labor costs was 4.3%, the most since the third quarter of 2000. "Rising unit labor costs are only inflationary if they translate into price increases," said Joshua Shapiro, chief economist at Maria Fiorini Ramirez.

Factory Orders for April rose .9% versus estimates of a 1.1% gain and an upwardly revised .7% increase in March. US factory orders rose the most since November, spurred by demand for autos, aircraft and computers. Excluding transportation equipment, orders fell .2%. Orders for capital goods excluding aircraft, a proxy for future business investment, rose 1.7% in April after declining 1.6% in March. "Factory orders are in better shape than they seemed to be in the first quarter, but not as strong as you would like," said Kevin Harris, chief economist at Informa Global Markets.

The Unemployment Rate for May fell to 5.1% versus estimates of a 5.2% rate and a 5.2% rate in April. Average Hourly Earnings for May rose .2% versus estimates of a .2% increase and a .3% gain in April. The Change in Non-farm Payrolls for May was 78K versus estimates of 175K and 274K in April. The Change in Manufacturing Payrolls for May was -7K versus estimates of -5K and -9K in April. US employers added 78,000 workers to their payrolls last month, the fewest since August 2003. The unemployment rate unexpectedly fell to 5.1% from 5.2% in April and is now the lowest since September 2001. There were job gains in education and health services, while losses were mainly in the information services, real estate and leisure/hospitality industries. The divergent reports created "confusion and uncertainty about underlying conditions in the job market," said David Resler, chief economist at Nomura Securities. Sherry Cooper, chief economist at BMO Nesbitt Burns said the jobs number "all but seals the deal on a coming cessation in Fed tightening."

The ISM Non-Manufacturing Index for May fell to 58.5 versus estimates of 60.0 and a reading of 61.7 in April. The ISM Non-manufacturing Index fell to a two-year low in May, but is still at relatively high levels. The index of new orders for non-manufacturing companies rose to 59.7 from 58.8. The index of order backlogs rose to 56.5 from 54.0. Export orders increased to 62.0 from 52.5. The gauge of prices paid declined to 57.9 from 61.9. This is the lowest level for prices paid since August 2003 and is down 22% since October 2004. "The activity level is still at a relatively high level," said Ralph Kauffman, chairman of the institute's non-manufacturing survey.

BOTTOM LINE: Overall, last week's economic data were modestly negative. Rising stock prices, a booming housing market, lower long-term interest rates, lower gas prices and rising incomes boosted consumer confidence. While we have likely seen the lows in sentiment for the year, the recent rise in energy prices and mixed employment report may suppress confidence awhile longer. The ongoing inventory correction will continue to dampen manufacturing activity for a couple more months. However, I expect manufacturing to accelerate thereafter as consumer spending remains very healthy. I continue to believe construction will help sustain modest US growth through at least year-end. Problems in the European Union, slowing global growth and much better inflation readings are resulting in lower long-term interest rates in the US. The rise in productivity is a welcome positive, considering the increase in unit labor costs. So far, there is little evidence that these costs are being passed to the consumer. Moreover, increasing labor costs haven’t pressured corporate profits to any extent. US corporate profits grew 4.5% in the first quarter and accounted for the largest share of the US economy since early 1967. I also expect moderating job gains over the coming months to dampen labor costs somewhat going forward. Finally, the steep declines in the prices paid indices bode well for future inflation readings. The employment report was mixed and strengthened my view that the Fed tightens once more in June before a “pause.” Average monthly non-farm payroll gains of 100,000-125,000 are enough to hold down unemployment and limit any acceleration in unit labor costs. I continue to believe GDP growth is temporarily slowing to around 2.5% this quarter, spurred by weakness in the manufacturing sector. 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 around average levels sometime during the third quarter. A recession in Europe or "hard landing" in China could potentially alter my future US growth expectations. Finally, the ECRI Weekly Leading Index fell .60% to 132.00 and is still forecasting slowing, but healthy levels of economic activity.

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