ECRI Weekly Leading Index 135.10 -.30%Construction Spending for August rose .4% versus estimates of a .4% gain and a .3% rise in July. US construction spending rose in August to a record, led by a jump in highway projects, and may climb for the rest of the year as rebuilding after Hurricane Katrina accelerates, Bloomberg said. Spending on residential construction rose .2%, non-residential construction spending rose .7% and government-funded construction rose .5%. “Activity will doubtless rise strongly in the fourth quarter and beyond as post-Katrina rebuilding gets under way,” said Ian Shepherdson, chief US economist at High Frequency Economics.
ISM Manufacturing for September rose to 59.4, the highest since August 2004, versus estimates of 52.0 and a reading of 53.6 in August. ISM Prices Paid for September rose to 78.0 versus estimates of 73.0 and a reading of 62.5 in August. US manufacturing unexpectedly accelerated in September, suggesting the recovery from two Gulf Coast hurricanes will be rapid, Bloomberg reported. The new orders component of the index rose to 63.8 from 56.4 in August. The employment component of the index rose to 53.1 from 52.6 in August. “The jump in new orders suggest that business was very good in September, and when business is good companies will feel better even though they’re facing higher input costs,” said Stephen Stanley, chief economist at RBS Greenwich Capital.
Factory Orders for August rose 2.5% versus estimates of a 2.0% gain and a 2.5% decline in July. Orders placed with US factories rose 2.5% in August, the third increase in four months, signaling manufacturing was gaining strength ahead of Hurricanes Katrina and Rita, Bloomberg reported. Bookings for commercial aircraft surged 9.2% following a 21% decrease in July. Orders for capital goods excluding aircraft, a barometer for future business investment, gained 3.1% after a 3.9% decline in July. The inventory-to-shipments ratio fell to 1.18 months, the lowest level since December, versus 1.2 months the prior month. Unfilled orders rose 1.6% and have now risen 10% over the last 12 months. “Manufacturing was going strong before Katrina hit and the ISM report told us Katrina didn’t have much effect on activity across the nation,” said Michael Moran, chief economist at Daiwa Securities. “With backlogs building, we should expect output and employment to remain sold,” said Joel Naroff, president of Naroff Economic Advisors.
Total Vehicle Sales for September fell to 16.4M versus estimates of 16.0M and 16.8M in August. Domestic Vehicle Sales for September fell to 13.0M versus estimates of 12.8M and 13.3M in August. General Motors and Ford Motor said US sales of cars and trucks plunged in September as the lure of employee discounts faded, while the largest Asian automakers gained at least 10%, Bloomberg reported. Gasoline prices damped sales of sport-utility vehicles such as the Ford Explorer, which plunged 58% last month. “You have gasoline prices at $3/gallon and it’s pushing the shift to smaller, more fuel-efficient vehicles,” said Kevin Tynan, an Argus Research analyst. Asian automakers captured 38.2% of the US market, their best showing in any September. Toyota said it was helped by soaring sales of the gasoline-electric Prius cars, hybrid Highlander and Lexus RX 400h SUVs. Nissan saw a surge in sales of its compact Sentra cars and mid-sized Altima sedans and Murano SUVs, the company’s most fuel-efficient models in their respective categories.
ISM Non-Manufacturing for September fell to 53.3 versus estimates of 60.0 and a reading of 65.0 in August. US service industries expanded at the slowest pace in more than two years in September as Hurricanes Katrina and Rita shut down Gulf Coast businesses and pushed costs for materials and supplies to a record, Bloomberg reported. The Prices Paid component of the index rose to 81.4 from 67.1. The employment gauge fell to 54.9 from 59.6. The New Orders component of the index fell to 56.6 from 65.8. “Service companies are clearly looking at the low readings on consumer confidence and are scaling back their expectations for growth this year,” said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi.
The Change in Non-farm Payrolls for September was -35K versus estimates of -150K and an upwardly revised 211K in August. The Unemployment Rate for September rose to 5.1% versus estimates of 5.0% and 4.9% in August. The Change in Manufacturing Payrolls for September was -27K versus estimates of -33K and an upwardly revised -9K in August. Average Hourly Earnings for September rose .2% versus estimates of a .2% increase and a .1% gain in August. Hurricane Katrina pushed the US unemployment rate up to 5.1% in September as the economy lost 35,000 jobs, fewer than expected and evidence that the storm wasn’t strong enough to derail the expansion, Bloomberg reported. The hurricanes Katrina and Rita may have eliminated up to 480,000 jobs temporarily, according to the latest estimates from the Congressional Budget Office. “This is a pretty good payroll number for September. The market dodged a bullet with this report,” said John Silvia, chief economist at Wachovia Corp. “It’s a very resilient economy that’s likely to be doing extremely well in a few months,” said Kurt Karl, chief US economist at Swiss Reinsurance.
Wholesale Inventories for August rose .5% versus estimates of a .4% increase and a .1% gain in July. Stockpiles at US wholesalers rose in August by the most in four months as companies rebuilt inventories to meet growing demand before the two hurricanes ripped into the Gulf Coast, Bloomberg reported. The inventory-to-sales ratio fell to 1.17 months. “Both sales and inventories advanced noticeably, underscoring the point that the economy was in quite good shape prior to the hurricanes,” said Stephen Stanley, chief economist at RBS Greenwich Capital.
Consumer Credit for August fell to $4.9B versus estimates of $5.0B and an upwardly revised $6.5B in July. Borrowing by US consumers rose at a modestly slower pace in August as American coped with rising interest rates and high gas prices, Bloomberg reported. Auto loans and other non-revolving debt rose $2.6 billion in August after rising $4.7 billion a month earlier. “The national statistics do not yet tell the story that the consumer is in debt up to his eyeballs,” said Chris Rupkey.
BOTTOM LINE: Overall, last week's economic data were modestly positive as most releases exceeded expectations. Construction will remain very strong and continue adding to economic growth for the foreseeable future as the effects of the highway bill and hurricane rebuilding take hold. Measures of manufacturing were accelerating before the hurricanes and have continued to maintain strength as evidenced by the strong surge in the ISM report and better-than-expected Factory Orders. Manufacturing will continue to boost economic growth through year-end as inventories are rebuilt after a mid-year slump. I expect prices paid indices to begin decelerating again towards year-end and fall throughout most of next year. Vehicle Sales were due for a slowdown after recent record activity related to employee discount promotions. However, I expect sales to remain relatively healthy as more Americans switch to fuel-efficient vehicles. The ISM Non-manufacturing Index will likely bounce back next month as consumer spending has remained healthy despite the effects of the hurricanes. Job growth should rebound sharply over the coming months, but not back to pre-hurricane levels. Considering the vigorous spending on autos and homes this year, it is not surprising to see consumer credit growth decelerate temporarily. However, Consumer Credit should also accelerate into year-end.
I continue to believe the US economy’s resilience is remarkable given the recent headwinds of record energy prices and massive hurricane-related dislocations. I see very little evidence of a significant economic slowdown. US growth has likely slowed to below average rates(below 3.1%) from very high levels before the hurricanes(above 4.5%). However, growth should accelerate back to at least average levels(around 3%) into year-end as energy prices continue to decline, inflation fears subside, corporate spending accelerates, job growth rebounds, incomes continue to grow faster than inflation, consumer confidence rebounds and hurricane rebuilding takes hold. These positives should mostly offset higher interest rates and a slowing housing market. With US growth at average rates, housing slowing to more healthy sustainable levels and measures of inflation decelerating, the Fed will likely “pause” during the first quarter of next year.
I disagree with those market participants that view the decline in energy prices as a significant weakening of the US economy. Global rig counts are at the highest level in almost 20 years. Global supply of oil is currently exceeding demand by at least 2 million barrels/day. Back in 2000 when the gap was at this point, oil was $25/bbl. I am seeing overwhelming evidence around the world of demand destruction, as a result of high prices, which will further widen this spread. In my opinion, oil has been trading at record highs on fear of a fourth quarter supply shortfall rather than fundamentals. T.Boone Pickens, the well-known energy hedge fund manager, has repeatedly stated that we would see demand exceed supply during the fourth quarter of this year. Demand for oil has been decelerating since last November. As we move closer to year-end, with demand for oil now falling rather than decelerating, the fear premium should be removed. I continue to expect oil to reach $35-$40/bbl. over the intermediate-term. Natural Gas is also trading at record prices on fear as evidenced by the supply build last week even with almost 70% of Gulf of Mexico production shut-in. I expect natural gas prices to follow oil meaningfully lower over the coming months. Finally, the ECRI Weekly Leading Index fell .30% to 135.10 and is still forecasting healthy US economic growth.
