Saturday, March 27, 2004

Economic Week in Review

ECRI Weekly Leading Index 134.10 -.07%

Concerns that inflation will soon accelerate are "premature," meaning the U.S. central bank can afford to wait before boosting interest rates, said Michael Moskow, president of the Federal Reserve Bank of Chicago. However, he also reiterated that the Fed can't maintain its rate stance "indefinitely." Moskow also said that the increase in raw materials costs was being offset by deflationary forces. Finally, he said that he isn't seeing signs that high energy prices are impacting consumers, business output or business production.

U.S. Durable Goods Orders rose 2.5% in February vs. expectations of +1.5% and -2.7% in January. Orders for computers, motor vehicles and aircraft led the way. Unfilled orders for business equipment, which gauges the ability of manufacturing to keep pace with demand, increased .7% in February, the biggest rise since October. Excluding transportation equipment, Durable Goods Orders declined .3% vs. expectations of a 1.5% rise and a .6% gain in January.

New Home Sales were 1163K in February vs. expectations of 1100K and 1099K in January. Purchases rose 12% in the Northeast, the fastest since January 1997. "The very high level of activity really ensures that consumer spending remains golden through the first half of this year," said Ken Mayland, chief economist of Clear View Economics.

The final GDP reading for the 4th quarter was 4.1%. This increase followed a gain of 8.2% in the 3rd quarter, resulting in the fastest six-month growth in almost 20 years. Corporate profits rose for a third consecutive quarter and were up 31% from the same quarter in 02, resulting in rapidly falling valuations for U.S. equities. Economists are now projecting the economy to growth 4.6% for all of 2004, the fastest economic growth since 1984.

The final Univ. of Mich. Consumer Confidence reading for March came in at 95.8 vs. a previous reading of 94.1 and expectations of 93.7. Income-tax rebates are up 5% on average from last year which may be buoying consumers until companies step up the pace of hiring, Bloomberg reported.

Macroeconomic Advisors, a private economic forecaster the Fed pays close attention to, says that for the rest of this year and 2005, the U.S. should see the heady combination of strong economic growth, payroll job gains of 200,000 a month, additional increases in corporate profits, significant gains in stock prices, only moderate rising interest rates and continued very low inflation.

BOTTOM LINE: The Fed, through multiple statements, made it clear last week that they do not see a significant pick-up in inflation, notwithstanding rising energy and base material prices. However, they also made it clear that they are going to raise rates at the first sign of sustainable job growth. I believe it will take two consecutive "above-expectations" jobs reports to prompt the Fed to raise rates. In my opinion, this will occur within the next 4-6 months at most. Ethan Harris, chief U.S. economist at Lehman Brothers said, "There's a legitimate concern that the general hue of news coverage on the economy has been very negative lately, and there's a risk of self-fulfilling expectations here." I agree with this statement and find it amazing that the Univ. of Mich. Consumer Confidence reading increased in the last two weeks. This is a significant development in my opinion. The U.S. consumer saw multiple terror attacks, the NASDAQ correcting almost 12%, record-high gas prices, very negative political campaigning and "slower-than-expected" job growth, yet consumer's confidence rose. Maybe the U.S. consumer is finally seeing through the mainstream media's intense focus on negativity and is realizing their net worth is at all-time highs, U.S. economic growth is at 20-year highs, the housing market is the best in U.S. history, corporate profits are near all-time highs, job creation is inevitable, there has not been a terror attack on U.S. soil since 9/11, inflation is near all-time lows, interest rates are near 46-year lows, unemployment is relatively low and falling, entrepreneurship is climbing, more parents are able to afford to send their children to college/graduate school and our standard of living is the highest in the world and climbing.

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