Economic Week in Review

ECRI Weekly Leading Index 131.00 -.61%

The Import Price Index for September rose .2% versus estimates of a .5% increase and a 1.4% increase in August. The Trade Balance for August was -$54.0B versus estimates of -$51.4B and -$50.5B in July. The increase in the trade deficit came on higher spending for imported oil, relatively strong U.S. economic growth and a decline in goods purchased by foreign countries. Inflation may be less of a concern for Federal Reserve officials after economic reports suggested pressure from high oil prices is not filtering through to other costs, Bloomberg reported. "Once demand picks up, it's possible you'll see some price moves but there seems to be a lot of restraint by U.S. businesses," said Michael Gregory, a senior economist at BMO Nesbitt Burns. "Much of the movement in core import prices is behind us," said Joshua Shapiro, chief U.S. economist at MFR Inc. "The dollar hasn't had any really big movements recently. U.S. growth is clearly better than most places."

Initial Jobless Claims for last week were 352K versus estimates of 340K and 337K the prior week. Continuing Claims were 2845K versus estimates of 2859K and 2856K prior. "This level is still consistent with solid job creation," said Wesley Beal, an economist at IDEAglobal. "This election seems to be causing more angst about the economy among business leaders than previous ones," said Chris Rupkey, senior economist at Bank of Tokyo-Mitsubishi. "Managers are concerned and they may be waiting until the dust settles before they bring in new hires." "We continue to have a labor market recovery for job seekers," said Steve Pogorzelski, President of Monster.com North America, the operator of the world's largest job-posting Web site. "We are still seeing strong online posting demand."

The Monthly Budget Statement for September was $24.4B versus estimates of $22.0B and $23.4B in August. The U.S. budget deficit rose to $412.6 billion, below mid-year estimates of $445 billion, in the year ended Sept. 30, as government tax receipts rose more than expected on faster U.S. economic growth, Bloomberg said. The budget deficit is now 3.75% of U.S. GDP, 36.2% lower than the all-time record set in 1983, Bloomberg reported. "If the financial markets felt that the government as a major borrower was not going to be a responsible manager of the fiscal affairs of this country, the market would already exact a price," said Treasury Secretary Snow. "The fact that interest rates are as low as they are is a vote of confidence that we will deal with the deficit."

The Producer Price Index for September rose .1% versus estimates of a .1% increase and a .1% decline in August. PPI Ex Food & Energy rose .3% in September versus estimates of a .2% gain and a .1% decline in August. The PPI averaged a .4% gain from January through June. So far this year, producer prices are rising at a 3.4% annual rate compared with a 4.3% increase at the same time last year, Bloomberg said. "Increased competition is making it tougher for companies to pass through cost increases to consumers," said William Zadrozny, CEO of Siemens Financial Services.

Advanced Retail Sales for September rose 1.5%, the most in 6 months, versus estimates of a .7% gain and a .2% fall in August. Retail Sales Less Autos for September rose .6% versus estimates of a .3% rise and a .2% gain in August. The biggest rise in auto sales in 3 years paced the increase in all retail spending last month, Bloomberg reported. Sales of cars and light trucks jumped to 17.5 million vehicles at an annual rate in September, a 5.4% increase from August. The average retail price for all grades of gasoline, while high at $2.04/gallon, is still lower than six months ago, Bloomberg reported. As well, sales at general merchandise stores, which include department stores, rose 1.1% last month, the most in 8 months. Retail sales account for almost half of all consumer spending, which in turn accounts for about two-thirds of the U.S. economy, Bloomberg said.

Empire Manufacturing for October came in at 17.43 versus estimates of 25.0 and a reading of 27.26 in September. Readings above zero indicate expansion and the survey has now shown growth since April 2003. In February, it reached an all-time record of 42.1, Bloomberg reported. The survey is a "confidence" measure as participants are asked to score a variety of indicators as "better" or "worse" than the prior month. As a result, it is likely affected by the negative political environment and concerns over the direction of the U.S. government, Bloomberg said. Moreover, the survey's hiring index for the next six months rose to 33.7 in October from 27.2 the previous month.

Industrial Production for September rose .1% versus estimates of a .3% increase and a .1% decline in August. Capacity Utilization for September was 77.2% versus estimates of 77.5% and 77.2% in August. Four hurricanes that swept across the southeast U.S. over a six week period in August and September reduced industrial production by about .3 percentage points last month, the Fed said. "These numbers are not as weak as the headline number suggests and that's good news because there will be a bounce-back," said Ken Mayland, president of ClearView Economics. "Retail sales say consumer demand is there," which is good for factory production," Mayland said.

The preliminary University of Michigan Consumer Confidence reading for October was 87.5 versus estimates of 94.0 and a reading of 94.2 in September. "Whatever consumers are saying, household spending remains strong and pretty sustained," said Michael Englund, chief economist at Action Economics. Sales of homes and autos remain very high, Bloomberg reported. Apple Computer's sales of its iPod digital music players surged 500% in the three months ended Sept. 25, Bloomberg said. As well, McDonald's said U.S. sales rose 11% in September. Finally, Wal-Mart Stores CEO Scott said, "We expect a strong finish to the year." Historically bitter political rhetoric filling the airwaves is likely depressing sentiment temporarily, Bloomberg reported.

Bottom Line: Overall, last week's economic data were mixed. Measures continue to show that inflation is contained. While commodity prices remain elevated, their rate of increase has slowed substantially from earlier months. The CRB Index, a broad-based measure of commodity prices, is trading at the same level it was 8 months ago. Energy remains the main area of concern and I continue to believe prices will begin heading lower once the effects of the record-setting hurricanes diminish and more supply reaches U.S. shores. This should occur at the end of this month or the first part of November. The labor market will improve upon the conclusion of the election. Small-business owners, the main job creators in the U.S., are extremely concerned about the outcome of the election and are likely holding off on new hiring to an extent. The increase in GDP growth I foresee during this quarter will also spur hiring.

The budget deficit remains an over-hyped problem by the bears and the media. As a % of GDP, the deficit is much smaller than in 1983, at the very beginning of a multi-decade secular bull move in U.S. stocks. As well, tax receipts have risen 5.5% over the last 12 months, notwithstanding the tax cuts. The increase in the deficit is a result of government spending outpacing receipts. However, considering the massive overcapacity generated during the latter part of the 90's in most sectors, it is highly probably the U.S. needed the dramatic increase in government spending and tax cuts to boost demand and burn off some of the excess capacity. Instead of one of the mildest recessions on record, massive job losses and bankruptcies would have likely resulted in a multi-year deep recession.

The much-better-than-expected retail sales report is a big positive. While auto incentives did spur demand, an auto is still a very large purchase and shows the consumer has confidence in their financial condition. As well, home sales remain near very high levels. I expect this holiday shopping season to beat expectations, notwithstanding higher energy prices. Once again, the bears and media are painting a more negative picture of the U.S. consumer than is actually the case. I continue to believe that investors are underestimating the negative impact the current election is having on economic activity. It is highly unusual to turn on the news and hear anything positive. Negative stories on Iraq, oil or jobs dominate reporting, while very few positives are reported. This is definitely affecting psychology and will likely subside to an extent in November. Moreover, fears of domestic terrorism, higher taxes and more regulations are also affecting decision-makers.