ECRI Weekly Leading Index 131.40 -1.79%
Construction Spending for November fell .4% versus estimates of a .4% rise and a .3% increase in October. "Construction of all types is still strong, particularly given that November was a month in which the weather did not cooperate," said Neal Soss, chief economist at Credit Suisse First Boston. The month was the fifth-wettest November in US history, according to records dating back to 1895. Construction spending was up 6.9% over the same month in 2003, Bloomberg reported.
ISM Manufacturing for December rose to 58.6 versus estimates of 58.5 and a reading of 57.8 in November. ISM Prices Paid for December fell to 72.0 versus estimates of 72.0 and a reading of 74.0 in November. "The economy was accelerating at the end of the year and into the new year," said Robert Mellman, an economist at JP Morgan. Falling energy prices "are raising real incomes of consumers and making business a little less cautious." The new orders component of the index surged to 67.4, the highest since January of last year, from 61.5 in November, Bloomberg said. The report showed commodity prices were the biggest concern among manufacturers. The CRB Index, the broadest measure of commodity prices, has declined 4.2% since the last week in November. The ISM index averaged 60.5 last year, the highest yearly average since 65.9 in 1973, Bloomberg reported.
Factory Orders for November rose 1.2% versus estimates of a 1.0% increase and an upwardly revised .9% increase in October. Orders would have been even stronger if it were not for the 32% slump in demand for defense equipment, a volatile part of the report, Bloomberg said. Without military hardware, bookings rose 2.3%, the most since March. Bookings waiting to be filled jumped 1.1%, the most since July, suggesting production will accelerate early this year and boost economic growth. "Business confidence about the economy is rising," said Joel Naroff, president of Naroff Economic Advisors. Naroff was the best GDP forecaster for the year ended in June, according to a Bloomberg survey. Bookings waiting to be filled for capital equipment, excluding aircraft, increased .6%. "Its unfilled orders that are the stronger piece of this report," said Neal Soss.
The Federal Reserve's Open Market Committee concluded interest rates were still too low "to keep inflation stable" and said rising prices may become a risk to growth, according to minutes of its Dec. 14 meeting, Bloomberg reported. Treasury securities and stocks declined on the news, Bloomberg said. Some members were concerned about potential signs of "excessive risk-taking" amid low rates, citing credit spreads and increasing numbers of mergers and initial public offerings, the minutes said. "With the economic expansion firmly entrenched, cost and price pressures are likely to become a clearer intermediate-term risk to sustained good economic performance absent further reduction of accommodation," the minutes said.
Total Vehicle Sales for December rose to 18.4M versus estimates of 16.9M and 16.4M in November. Domestic Vehicle Sales in December rose to 14.7M versus estimates of 13.5M and 12.9M in November. Toyota Motor, Nissan Motor and Honda Motor said December US auto sales soared more than 20%, leading the industry to its highest sales rate since no-interest loans restarted the market after the 9/11 attacks, Bloomberg said. "It was a lot stronger month than most people expected," said Sasha Kamper, who helps manage $65 billion at Principal Global Investors. "There really is a heck of a lot of pent-up demand out there," said Robert Hinchliffe, a UBS Securities analyst. "It's a good time for vehicle sales overall, but the Big Three just keep losing market share."
ISM Non-Manufacturing for December rose to 63.1 versus estimates of 61.0 and a reading of 61.3 in November. US services expanded in December at the fastest pace in five months, capping a record year for the biggest part of the economy, Bloomberg reported. Orders accelerated and more companies said they were adding to inventories to meet rising demand, according to the survey. Retailers' sales surged 4.6% in the week after Christmas. This gain amounted to the biggest increase in six months and helped retailers meet a December forecast for a gain of as much as 3.5% at stores open at least a year, Bloomberg reported. "Consumer Spending, fueled by expectations of sustained income growth, should continue to expand at something near the strong pace we have been seeing," said Jeffrey Lacker, president of the Federal Reserve Bank of Richmond.
The Unemployment Rate for December was 5.4% versus estimates of 5.4% and 5.4% in November. Average Hourly Earnings in December rose .1% versus estimates of a .2% increase and a .1% gain in November. The Change in Non-farm Payrolls for December was 157K versus estimates of 175K and an upwardly revised 137K in November. The Change in Manufacturing Payrolls for December was 3K versus estimates of 0K and a downwardly revised –9K in November. Average Weekly Hours for December were 33.8 versus estimates of 33.8 and 33.7 in November. Job gains for October and November were revised higher by a combined 34,000, bringing the total for 2004 to 2.23 million, the best showing since before the stock market bubble burst and the economy began to plunge into recession in 2000, Bloomberg reported. Moreover, manufacturers added 76,000 jobs for the year, the best since 1997. "We have enough job growth to continue to give us income creation, which will help support consumer spending," said Joseph LaVorgna, chief US fixed income economist at Deutsche Bank. "The economy is in good shape and it's really steady as she goes."
Bottom Line: Overall, last week's economic data were positive. Construction will likely slow in 2005, but remain at healthy levels as long-term interest rates remain low by historic standards. Measures of manufacturing accelerated into year-end and should help boost US growth during the first quarter of '05. Prices Paid should fall through most of the first-half of the year as commodity prices weaken further and pricing power remains limited. The Fed's hawkish comments had a substantial negative effect on US financial markets. However, I believe these comments were a reflection of their desire to stem the rate of decline in the US dollar. I do not believe the Fed will raise rates in '05 at the rate the market currently expects. Weaker global growth, a stabilizing US dollar and decelerating inflation readings will prompt the Fed to slow their pace of increases. The very strong gain in vehicle sales in December and good holiday retail sales once again proves the bears incorrect in their obsessive worries over the demise of the US consumer. As long-term interest rates remain low, inflation readings decelerate, income gains continue and increasing employment is sustained, the US consumer should remain relatively healthy in the intermediate-term. In my opinion, the 157,000 jobs created in December is a perfect level for the health of the US economy. Gains consistently under 100,000 would hurt consumer spending and sustained increases above 200,000 would boost unit labor costs. Since unit labor costs are by far the greatest component of inflation, this would result in substantially higher interest rates. The only real negative from last week's data was the abrupt decline in the ECRI Weekly Leading Index. I would become concerned if this index continued to decline at this rate.
