Tuesday, October 31, 2006

Wages and Benefits Rise, Confidence Falls Slightly, Chicago PMI Declines, Prices Paid Plunges

- The 3Q Employment Cost Index rose 1.0% versus a .9% gain in 2Q.
- Consumer Confidence for October fell to 105.4 versus estimates of 108.0 and an upwardly revised 105.9 in September.
- The Chicago Purchasing Manager report for October fell to 53.5 versus estimates of 58.0 and a reading of 62.1 in September.
BOTTOM LINE: Wages and benefits paid to American workers last quarter by the most since 2004 as the unemployment rate matched a five-year low, Bloomberg said. Benefit costs rose 3.3% year-over-year in 3Q versus a 3.4% yearly gain in 2Q. A recent Manpower survey showed that almost a third of the businesses surveyed said they would have hired even more people this year if they could find the talent. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

An index of confidence among US consumers fell slightly after a strong rebound the prior month, Bloomberg reported. Optimism about consumers’ present situation declined to a still high 124.7 from 128.3 the prior month. The expectations component of the index, which measures consumer attitudes about the next six months, rose to 92.6 from 91 the prior month. The percentage of people expecting more jobs to be available in the coming months rose to 15.2% versus 14.7% the prior month. The average price of gasoline fell to $2.20/gallon on Oct. 24, the lowest since December and down .53/gallon from Sept. 4 prices, according to the American Automobile Assoc. Rising incomes, stock prices and job growth are also helping boost sentiment. The S&P 500 has surged 17% over the last year. I continue to believe consumer confidence will make new cycle highs over the intermediate-term as stocks rise further, inflation decelerates, interest rates remain low, the job market remains healthy, housing stabilizes at relatively high levels, gas prices fall further and irrational pessimism lifts.

Business activity in the Chicago region slowed to year-ago levels, Bloomberg reported. The New Orders component of the index fell to 59.2 from a high 67.4 the prior month. The Inventory Index rose to 67.21 from 63.5 the prior month. The Employment Component of the index jumped to 57 from 50.8 in September, the highest since April 2005. As well, the Prices Paid component of the index fell to 62.5, the lowest since June 2005 and down 30% from cycle highs, from 69.8 the prior month. I expect manufacturing to begin to rebound next quarter as auto production cutbacks subside.

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