Economic Week in Review

ECRI Weekly Leading Index 134.10 (no update this week)

The Chicago Purchasing Manager Index for March fell to 57.6 vs. 63.6 the prior month and expectations of 61.0. "The upsurge in manufacturing activity that has occurred over the last several months is continuing, but at a slower pace," said Kevin Logan, a senior economist at Dresdner Kleinwort Wasserstein.

The Producer Price Index for February rose .1% vs. .3% the prior month and expectations of .3%. The PPI Ex Food & Energy for February rose .1% vs. .3% the prior month and expectations of .1%. "People will probably express some relief at the small gain in producer prices after the increase in January, but the bigger story is in the early stages of production," said Stephen Stanley, chief economist at RBS Greenwich Capital.

The ISM Manufacturing Index for March rose to 62.5 vs. 61.4 the prior month and expectations of 59.5. The ISM Prices Paid Index for March rose to 86.0 vs. 81.5 the prior month and estimates of 82.0. The ISM Manufacturing Index and its employment component were both near two-decade highs. Companies produced more cars, electronics and business equipment as they attempted to restock depleted shelves. "The breadth of the expansion as well as its speed is breathtaking. No need for fancy over-thinking. Plain and simple, this report tells us that the manufacturing sector is smoking," said Stephen Stanley.

The world economy, led by Asia and the U.S., is projected to grow 4.75% this year, the strongest performance in a generation, according to a semiannual forecast from the Institute for International Economics. "It is clear we are in boom right now -- a U.S. boom, a world boom," C. Fred Bergsten, director of the research group, told an audience at its Washington headquarters.

The Change in Non-farm Payrolls for March was 308,000 vs. 46,000 the prior month and expectations of 120,000. Manufacturing Payrolls were unchanged for March vs. a loss of 4,000 the prior month and expectations of a 5,000 gain. The Unemployment Rate for March was 5.7% vs. 5.6% the prior month and expectations of 5.6%. The 308,000 jobs added was the largest gain since the stock market bubble burst in early 2000. Strength was apparent across the board. Alan Binder, former Fed vice chairman said, "Once job creation is firmly established at a solid pace, the Fed is going to start raising rates."

BOTTOM LINE: The key takeaway for the week is that the U.S. economy is in great shape and getting better. The one missing component of this recovery was job creation. Historically, significant job creation occurs 6-9 months after the first real burst in economic growth coming out of a recession. This happened in the 3rd quarter of last year and right on schedule the U.S. economy has its first exceptional jobs report. I now believe the Fed will raise rates at the June 29-30 meeting as I expect another really good jobs report in the next 2 months and hints of inflation are cropping up in the early stages of production. The market is currently expecting the Fed to make its first move at the August 10 meeting.

The fact that the economy added the most jobs since early 2000 and is growing at the fastest rate since the early 80's is even more impressive considering the environment at the time of the stock market bubble. Many companies employing hundreds of thousands of people were created on pure hype. Inexperienced and corrupt management teams, with faulty business models, used "creative" accounting to boost their stock prices to sell more shares to the public. This gave them the capital to hire more people to rapidly increase sales at the expense of profits, giving the appearance of growth. In the current environment, companies with good business models, selling real products, using relatively little "creative" accounting are the most profitable in history. It took awhile to burn off the excess capacity generated by the greatest economic bubble in U.S. history. This is why the recovery appeared to be in slow-motion. However, beginning with the 8.2% growth of the 3rd quarter of 03, the fastest since the early 80's, and now with the best job creation since the stock market bubble in 2000, the U.S. economy is in a full-fledged boom.