Saturday, December 11, 2004

Economic Week in Review

ECRI Weekly Leading Index 133.00 +.45%

Final 3Q Non-farm Productivity rose 1.8% versus estimates of a 2.0% increase and a prior estimate of 1.9%. Final 3Q Unit Labor Costs rose 1.8% versus estimates of a 1.6% gain and a prior estimate of 1.6%. The productivity of U.S. workers grew in the third quarter at the slowest pace in almost two years, suggesting companies may need to boost hiring to meet demand, Bloomberg said. Moreover, hours worked rose at a 2.4% pace, the most since the third quarter of 1999. "Labor costs have moved from a downward influence on inflation to a neutral one," said Stephen Stanley, chief economist at RBS Greenwich Capital. "Fed officials have consistently noted that labor costs are the key to inflation, not material costs."

U.S. Household Net Worth advanced to another all-time high of $46.7 trillion as stock market and real estate values appreciated, the Fed said. Consumer Credit for October fell to $7.7B versus estimates of $6.0B and an upwardly revised $13.6B in September. The percentage of homeowners in foreclosure fell to 1.14%, the lowest level in 4 years. "Consumers are confident enough in the outlook for the economy to assume greater debt burdens," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi. Personal bankruptcy filings across the country declined 2.6% for the fiscal year ended Sept. 30, suggesting most consumers are able to handle their rising debt, and that spending will continue, Bloomberg reported. Sales at U.S. retailers rose 3.3% during the first full week of the holiday season.

The Import Price Index for November rose .2% versus estimates of 0.0% and a 1.6% increase in October. The dollar's decline this year against other currencies makes imported goods more expensive, Bloomberg said. The report "echoes what we've seen in the broader price measures – big run-ups in prices of crude and intermediate goods but only a limited pass-through to consumer prices," said Stephen Stanley. "There is still little evidence as of yet that the Fed is risking a substantial acceleration in core consumer price inflation." "Import competition, particularly from China, is keeping downward pressure on manufactured products, such as apparel and fabricated metals," the Dallas Fed said in its regional report.

Initial Jobless Claims for last week were 357K versus estimates of 335K and 349K the prior week. Continuing Claims were 2796K versus estimates of 2746K and 2705K prior. "As oil prices come down, that should make companies a little less reluctant to hire," said John Shin, an economist at Lehman Brothers. Claims have fallen to a weekly average of 344,102 so far this year from 402,000 for all of 2003, Bloomberg said.

Wholesale Inventories rose 1.1% in October versus estimates of a .5% gain and a .6% increase in September. Consumer purchases rose the most in almost three years last quarter and business investment accelerated, recent reports have shown. Gains in spending caused inventories to rise at almost half the previous quarter's pace, leaving businesses room to add to stockpiles, boosting the economy this quarter, Bloomberg reported. "If you have sales booming, you have to have inventories keep pace," said Tom Rogers, chief economist at Wholesalers had enough supply on hand to last 1.15 months at the current sales pace, the same as the prior month and up from an all-time record low of 1.12 months in April, Bloomberg said.

The Producer Price Index for November rose .5% versus estimates of a .1% increase and a 1.7% gain in October. The PPI Ex Food & Energy for November rose .2% versus estimates of a .2% increase and a .3% gain in October. "So far, businesses have been more successful in passing along cost increases to other business, but with consumers it's been much more difficult," said Nigel Gault, research director at Global Insight. The 26.4% decline in oil, the 31.9% plunge in natural gas and the 23.6% drop in heating oil should help restrain producer prices going forward, Bloomberg reported.

The preliminary Univ. of Mich. Consumer Confidence reading for December rose to 95.7 versus estimates of 93.5 and a reading of 92.8 in November. Job growth is helping bolster consumer spending and confidence and consumers have benefited from the decline in oil and gasoline prices, economists said. The U.S. economy has added 2.2 million jobs since August of last year, Bloomberg said. The current-conditions component of the index, which reflects Americans' perception of their financial situation and whether it's a good time to buy big-ticket items, rose to 106.8 from 104.7 in November. The expectations component of the index, based on optimism about the next one to five years, rose to 88.8 from 85.2, Bloomberg said. "With the recent drop in energy prices consumer spending will give us a good holiday season," said Lynn Reaser, chief economist at Banc of America Capital.

Bottom Line: Overall, last week's economic data were positive. Productivity has fallen to levels normally associated with increased hiring. However, mitigating forces should hold unit labor costs in check in the intermediate-term. A modest increase in the rate of US job creation, a stabilizing US dollar, deflationary forces in Asia, continuing overcapacity in some areas of the US economy and falling commodity prices should lead to decelerating inflation readings in 2005. This will allow the Fed to slow the pace of rate hikes. With Americans' net worth at ALL-TIME high levels, a modest rise in interest rates next year should not significantly damage consumer spending or the US economy. Inventories are rising to keep up with brisk demand and should contribute meaningfully to 4Q GDP. It is very good to see Consumer Confidence rebound from recent disappointments. A very strong housing market, rising stock market, declining energy prices, good labor market, elections in Iraq, less pessimism from politicians, relatively low interest rates and diminished domestic terrorism fears should lead to new highs in consumer sentiment for this cycle in the next few months. The Weekly Leading Index is now at its highest level since late June.

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