ECRI Weekly Leading Index 136.00 +.59%
Construction Spending rose 1.5% in March versus expectations of a .5% gain and a .1% drop in February. Moreover, total U.S. construction spending is rising at a record annual pace of $944.1 billion, as work increases on highways and other public works as well as private homes and office buildings. "We've been seeing an improving economy for the last year and a half and I think we're going to see improved occupancy in both apartments and offices," said Sam Zell, chairman of Equity Residential and Equity Office Properties, the largest office and apartment landlord in the U.S. Finally, Wienerberger AG, the world's biggest brick-maker, said it is spending $50 million in the U.S. to enlarge capacity at plants in Rome, Georgia; Brickhaven, North Carolina; Louisville, Kentucky, Bloomberg reported.
The ISM Manufacturing Index for April held near a two-decade high coming in at 62.4 versus expectations of 62.7 and 62.5 in March. Production increased and more factories added workers than at any time since 1987. "The combination of lean inventories, strong demand and a weak dollar is clearly leading to an underlying pick-up in factory activity," said David Greenlaw, chief U.S. fixed income economist at Morgan Stanley. The ISM Prices Paid Index rose to 88.0 in April, the highest since 1979, versus expectations of 85.0 and a reading of 86.0 in March. Finally, the Backlog of Orders Index rose to an all-time high.
Factory Orders for March rose 4.3% versus expectations of a 2.4% rise and .3% in February. This was the largest year-over-year increase since the stock market bubble burst in 2000, as the strongest economic growth since 1984 prompted companies to buy more machines, electronics and petroleum. Manufacturers had a record-low 1.23 months worth of inventories at the current sales pace in March. "With inventories low and firms finding it hard to gain traction to both meet demand and bring stocks to a more comfortable level, we can expect increased hiring and accelerated production," said Drew Matus, an economist at Lehman Brothers.
Federal Reserve policy makers voted unanimously to keep the benchmark U.S. interest rate at a 45-year low of 1%. "At this juncture, with inflation low and resources use slack, the committee believes that policy accommodation can be removed at a pace that is likely to be measured," members of the rate-setting Open Market Committee said in a statement following their meeting in Washington, Bloomberg reported.
The U.S. budget deficit may narrow to $370 billion this year, 29% lower than White House estimates, as a vigorous economy boosts tax revenues, economists at Citigroup said in a weekly report. "This sharp upturn in tax receipts has sweeping positive implications for the Treasury's financial position," the report said. State tax receipts are also rising as the U.S. economy expands. The National Conference of State Legislatures said last week that 32 states predict they will have surpluses this year. States had posted a record $78.4 billion in deficits last year.
The ISM Non-manufacturing(Services) Index rose to an all-time record of 68.4 in April versus expectations of 65.0 and a reading of 65.8 in March. "The economy is getting even better as business spending and hiring are driving things," said Robert Mellman, an economist at J.P. Morgan. Services account for 85% of the $11.3 trillion U.S. economy. The survey's employment index rose to the highest level since 2000, as well. Economic conditions "are extremely strong, really everywhere," Jeff Immelt, CEO of General Electric said. "We're seeing volume up in the U.S. and Europe in every one of our businesses."
Non-farm Productivity for the 1st quarter rose 3.5%, meeting expectations, versus 2.5% in the 4th quarter. Unit Labor Costs for the 1st quarter rose .5% versus expectations of 0.0% and 0.0% in the 4th quarter. "It's really labor that is the most important input and stable labor costs suggest little inflation and more willingness on the Fed's part to move very slowly" in raising rates, said Tim Rogers, Chief Economist at Briefing.com.
The Unemployment Rate in April fell to 5.6% versus expectations of 5.7% and a 5.7% rate in March. Change in Non-farm Payrolls was a positive 288,000 in April versus a 170,000 estimate and 337,000 jobs created in March. Change in Manufacturing Payrolls in April was a positive 21,000 versus a 5,000 estimate and 9,000 jobs created in March. The revised March figures showed that manufactures increased hiring for the first time in 42 months. Total job gains in the last two months were the most since early 2000, Bloomberg reported. Since the job market turned around in September, the economy has added 1.1 million jobs. "After March, it looked like payrolls were finally getting into synch with everything else. Now they've really caught up with what everything else was telling us, and that is the economy is growing at a really strong rate," said Robert McGee, chief economist at U.S. Trust. The economy is now projected to grow 4.6% this year, the most since 1984, Bloomberg reported.
Bottom Line: The main economic data points released last week were almost universally above-expectations and continued to paint a very strong picture of the current state of the U.S. economy. However, as each report during the week seemed stronger than the previous, investors began to sell bonds and send interest rates higher. The 10-yr T-note is now yielding 4.77%, the highest since July 2002. The long-term downtrend line in interest rates, dating back to 1987, is around 5.7%. I highly doubt the downtrend will be broken at this point, but a move near this level is possible, barring any significant negative jolt to world economic growth. Retail sales came in a bit below expectations last week, but this may be explained by extraordinarily good weather and a rush by consumers to spend their time buying homes and lock in relatively low rates before any further increases. Almost every commodity is currently falling in price with the exception of energy. This is troubling considering this is a seasonally weak time of the year for energy demand. Crude oil is now at its highest level since the Gulf War in 1990. However, the U.S economy is much less dependent on low energy prices than in the past. The International Energy Agency, in a recent report, estimates high energy prices are shaving only about .3% off of current U.S. economic growth.
Home sales should remain relatively robust as job growth accelerates, offsetting higher interest rates. The ISM and Factory Orders reports both point to an accelerated rate of hiring and production in the coming months. I am not sure of the extent to which a falling budget deficit will lower interest rates, but it is a very positive development nonetheless. Unit labor costs, the largest component of inflation, rose for the first time in a year, but remain at relatively subdued levels. The two blow-out jobs reports I anticipated have occurred, thus the Fed could move interest rates higher at any time from their current 45-year low emergency levels. Barring an intra-meeting move, the June 29-30 meeting will likely result in the first Fed rate hike. The Fed will probably raise rates by 50 basis points at this time. Overall, last week's data were very positive as the "jobless recovery" myth perpetuated by the mainstream media is no longer debatable. Historically, mild inflation has been good for stocks as companies regain pricing power, profits soar and hiring accelerates. The main worry I have at this point is that the media's obsession with negativity is hurting investor psychology, thus potentially creating a self-fulfilling prophecy of slower economic growth.
