Sunday, February 08, 2004

Economic Week in Review

ECRI Weekly Leading Index 132.60 -.15%

The ISM Manufacturing index rose to 63.6 in January, a 21-year high, as factories boosted production to replace depleted inventories and meet improving demand. The pace of growth in the last 6 months of 2003 was the strongest in 2 decades, causing inventories to drop to record lows. Manufacturing may also be getting a boost from rising exports. Growth last quarter was augmented by a 19.1% jump in exports, the biggest increase in 7 years. A weaker US dollar has resulted in a dramatic increase in competitiveness for US companies overseas. The ISM Services Index rose to 65.7, its highest level since its inception in July 97. This is a very important number since services account for 85% of the US economy. Productivity came in at 2.7%, down from 9.4% last quarter. This bodes well for an increase in hiring. However, January's change in non-farm payrolls was only an increase of 112,000, below estimates of 172,000. This was the largest increase in jobs created in over 3 years, yet disappointed analysts. The headline unemployment rate dropped to 5.6%. Retail sales climbed a brisk 5.8% in January on increased sales of cold-weather clothing and increasing consumer confidence. Fed Governor Ben Bernanke said that he expects "some large employment gains fairly soon." He also stated that the Fed could be patient over the next few months because inflation will remain subdued through 05.

BOTTOM LINE: The very high readings for services, manufacturing and retail sales leads me to expect a very good 1Q GDP number. Currently, economists are projecting 4.4% GDP growth. I believe a number north of 5% is more likely. This, combined with record low inventories and decreasing productivity leads me to conclude that we are finally at the cusp of a significant pick-up in hiring. Within the next 2 months, we should finally see employment growth exceed expectations.

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