Consumer Credit for January rose $11.5B versus estimates of a $5.2B gain and an upwardly revised $8.7B increase in December. Consumer spending, which accounts for two-thirds of the US economy, picked up even after the Fed raised rates to 2.25% in December from 1% in June to stem inflation, Bloomberg said. "The outlook for consumer spending continues to brighten, and the big jobs report last Friday can only help to make consumers more confident in the future," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi. "Consumers tend to delay paying off their credit card bills in the first month after year-end holidays. Consumer debt levels are probably not rising as fast as the January figures indicate," he said. Moreover, US bankruptcy filings actually dropped in 2004 for the first time in 4 years, led by a decline in applications from consumers as the economy improved, according to a report from the Administration Office of the US Courts.
Manufacturers in parts of the US found it easier to pass on rising material and labor costs to customers in January and February, the Federal Reserve said in its Beige Book report. Even so, "retail prices were generally flat or up modestly," said the survey. Moreover, prices paid by US consumers rose only .1% in January, Bloomberg said. Wage increases were "moderate" in all regions, the Beige Book said. Industries with the best wage gains were legal services, accounting, securities and trucking. "The big picture for inflation is still benign, but the rumblings get a little louder with each succeeding beige book," said Stephen Stanley, chief economist for RBS Greenwich Capital. Fed officials including Governor Ben Bernanke and St. Louis Fed Bank President William Pool said this week that inflation is well controlled, Bloomberg reported. "With the economy strengthening, with inflation stable, at this point my expectation is that the committee will continue to remove policy accommodation in a measured way," Bernanke said in a speech in Chicago.
Initial Jobless Claims for last week rose to 327K versus estimates of 310K and 310K the prior week. Continuing Claims rose to 2703K versus estimates of 2662K and 2664K prior. The four-week average of claims, a less volatile measure, increased to 312,500 from 306,750, which was the lowest in more than four years, Bloomberg reported. Part of the larger-than-forecast level of claims may have been a rebound from the prior week, when the President's Day holiday limited the number of days people could file, Bloomberg said. "The labor market's not tight but it's tightening," said Roger Kubarych, a former Federal Reserve economist who is now a senior adviser at HVB America. "We're doing right now annually about 7,000 searches or so and that's kind of doubled from where it was two to three years ago," said Gary Burnison, COO of Korn/Ferry International, the world's largest executive search firm.
Wholesale Inventories for January rose 1.1% versus estimates of a .6% increase and a .4% gain in December. Wholesaler sales in January rose for a record 20th consecutive month, and the ratio of stocks to sales was near historic lows, Bloomberg said. The increase was led by a gain of 2.2% for automobiles and parts and 2.2% as well for metals, Bloomberg reported. The buildup in stockpiles is likely to reinforce expectations that the economy will grow faster this quarter than at the end of 2004, Bloomberg reported. "I view the solid growth in inventories and sales in January and the low ratio of inventories to sales as a sign that this is an intentional buildup," said Mick Englund, chief economist at Action Economics. "It says firms know that their sales are increasing," he said.
The Monthly Budget Statement for February was -$113.9B versus estimates of -$100.0B and -$96.7B in January. An early rush of tax refunds helped magnify the shortfall in February, said David Resler, chief economist at Nomura Securities. "We still expect the fiscal year 2005 deficit to narrow to about $372.0B," he said. For the first five months of the year, the deficit totaled $223.4B, down 2.2% from the first five months of the previous year, Bloomberg reported. "The key period is really the March-to-May period as the bulk of refunds go out then and the April 15 payments start to come in," said Stephen Stanley, chief economist at RBS Greenwich Capital.
The Trade Balance for January widened to -$58.3B versus estimates of -$56.8B and -$55.7B in December. China, whose textile exports surged after quotas ended this year, accounted for more than a quarter of the shortfall, Bloomberg said. Americans' appetite for new cars, clothes, furniture and televisions caused imports to swell to a record $159.1B, Bloomberg reported. An increase in the price of oil since January may further widen the gap. "Import growth is definitely stronger than anticipated, and that's just another indication of strong demand in the US," said Stephen Stanley. Economists at Morgan Stanley lowered their 1Q GDP forecast after the report to 4% from 4.5%, Bloomberg said. Also, the US dollar fell to near a two-month low against the euro, leaving it little changed so far this year. Countries that use the euro as their currency are forecast to grow 1.6% this year, according to economists surveyed this month by Blue Chip Economic Indicators. "Should globalization continue unfettered and thereby create an ever-more flexible international financial system, history suggests that current account imbalances will be defused with modest risk of disruption," Fed Chairman Greenspan said in a recent speech.
BOTTOM LINE: Overall, last week's economic data were mixed. The US consumer continues to defy the bears as an improving labor market, relatively low interest rates and investment gains are spurring strong consumption. Spending should remain healthy over the course of the year. In my opinion, many factors are contributing to the increasing trade deficit, but the main reason is the exceptional strength of the US economy compared to other industrialized nations whose economy's are mired in stagnation as a result of high taxation and overregulation. The trade deficit will likely worsen in the near-term before improving in the second half of the year. The market appears to have overreacted to the Beige Book report, considering the recent decline in many other gauges of inflation. I continue to expect inflation to rise around the 40-year long-term average of 3.0% this year. Historically, modest inflation has been a positive for stock prices. The rise in Initial Jobless Claims is a positive as a deceleration in employment gains from last month's strong pace would calm fears over the possibility of rising unit labor costs. Inventory rebuilding, as a result of strong sales, will likely offset the negative effects of the trade deficit, leading to around 4% GDP growth for the first quarter. The increase in the Budget Deficit was likely an anomaly and should reverse over the next few months and begin improving again. Finally, the ECRI Weekly Leading Index rose .22% to 135.20 and is at cycle highs set in April 2004.