Sunday, February 06, 2005

Economic Week in Review

ECRI Weekly Leading Index 133.70 +.30%

Personal Income for December rose 3.7% versus estimates of a 3.4% gain and a .4% increase in November. Personal Spending for December rose .8% versus estimates of an .8% increase and a .4% rise in November. The PCE Deflator(YoY) for December rose 2.4% versus estimates of a 2.4% gain and a 2.4% increase in November. Greenspan's favorite inflation gauge, the PCE Core(YoY) for December rose 1.5% versus estimates of a 1.5% increase and a gain of 1.6% in November. US personal spending accelerated in December and incomes jumped the most since the government began record-keeping in 1959 as Microsoft made a one-time $32.6 billion dividend payout, Bloomberg said. As well, wages and salaries grew as employment improved, propelling consumer spending in the last six months of 2004 to the fastest in almost five years, Bloomberg reported.

New Home Sales for December rose to 1098K, capping a fourth consecutive all-time record year, versus estimates of 1200K and 1097K in November. "We're finally starting to see some signs of moderation in housing, which we as economists have been looking for," said Stephen Gallagher, chief US economist at Societe Generale. "It still looks like a healthy housing market going forward, but the string of consecutive records may finally be over." For all of 2004, the median price of a new home rose 12.3% to $218,900, the biggest increase since 1987, Bloomberg reported. Measured against sales, the supply of new homes rose to 4.8 months' worth in December, the highest since June 2000. "We see 2005 as being every bit as good as 2004, if not better," said Tim Eller, CEO of Centex. The backlog of ordered homes was up almost 20% in January from a year earlier and represents five to six months of production, Bloomberg said. The 30-year average mortgage rate fell to 5.63% last week, a 44-week low.

Chicago Purchasing Manager for January rose to 62.4 versus estimates of 59.0 and a reading of 61.9 in December. "Capital goods and consumer durable goods continue to be a healthy, vibrant part of the economy," said Chris Low, chief economist at FTN. The orders component of the index averaged 67 last year, the highest since 1994, Bloomberg said. The prices paid component of the index fell to 76.5 from 84.4, its lowest level since April of last year. "Some of the price pressures are abating a bit," Low said. "That's probably the most important element in the report in terms of keeping demand strong."

Construction Spending for December rose 1.1% versus estimates of a .5% increase and a .3% rise in November. Total construction spending for the year rose 9%, the biggest annual gain since 1996, Bloomberg said. The December gains were driven by projects delayed by wet weather the prior month. "I expect construction to add more to gross domestic product this year," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. "Non-residential construction has been weak for a couple of years," said Steven Wood, chief economist at Insight Economics. "It seems to be bottoming out and I see a modest upturn in 2005." "Better levels of employment and industrial production suggests expansion in both office and warehouse construction," said James Smith, chief economist for the Society of Industrial and Office Realtors.

ISM Manufacturing for January fell to 56.4 versus estimates of 57.0 and a reading of 57.3 in December. ISM Prices Paid for January fell to 56.4 versus estimates of 57.0 and a reading of 57.3 in December. For all of last year, the ISM Manufacturing Index averaged 60.5, the highest annual average since 1973, Bloomberg reported. "The manufacturing sector continues to expand briskly though, to be sure, it is decelerating from the pace experienced in late 2004," said Richard DeKaser, chief economist at National City. The component of the index measuring new orders fell to the lowest since June 2003. However, the employment component of the index rose to the highest level since June of last year.

Total Vehicle Sales for January fell to 16.2M versus estimates of 16.2M and 18.4M in December. Domestic Vehicle Sales for January fell to 13.0M versus estimates of 13.1M and 14.7M in December. GM and Ford have both now said North American production will fall more than 8% in the first quarter as Toyota Motor and Nissan Motor steal sales with new truck models, Bloomberg said. Asian automakers' US share last year rose to a record 34.6%, from 28.2% in 2000.

The FOMC raised the benchmark US interest rate a quarter-point to 2.5% and restated a plan to make future increases at a "measured" pace to keep inflation in check, Bloomberg said. The Fed's statement after the hike was virtually identical to December's, saying monetary policy "remains accommodative" and is "providing ongoing support to economic activity." The policy statement also said inflation is "relatively low." "As long as the fundamentals remain largely as they are now, the Fed is dialed in and they are prepared to deliver another 25 basis point rate rise at the next meeting," said Michael Woolfolk, senior currency strategist at the Bank of New York.

Preliminary Non-farm Productivity for 4Q rose .8% versus estimates of a 1.5% gain and a 1.8% increase in 3Q. Preliminary Unit Labor Costs for 4Q rose 2.3% versus estimates of a 2.0% rise and a 1.6% gain in 3Q. For all of 2004, productivity rose 4.1% after a 4.4% increase during 2003, Bloomberg said. Productivity had never grown more than 4% in successive years since records began in 1947. With productivity slowing and the economy growing, employers are likely to keep hiring to generate more output, economists said.

Factory Orders for December rose .3% versus estimates of a .6% gain and a 1.4% increase in November. Some economists expected the expiration of investment incentives at the end of the year to curb orders in December because equipment had to be delivered by Dec. 31 to take advantage of the tax break, Bloomberg said. "Strong business activity rather than the tax incentives have been driving the fast pace of factory orders and manufacturing," said Tim Rogers, chief economist at For all of last year, factory orders rose a record 11% to $4.39 trillion, Bloomberg reported.

ISM Non-Manufacturing for January rose to 59.2 versus estimates of 61.5 and a reading of 63.9 in December. The index which soared to an all-time record last year, remains high enough to sustain the expansion, economists said. The institute's gauge of prices that companies paid for materials and services was 66.6, the lowest since March of last year, Bloomberg reported. Gross domestic product increased 4.4% last year, the most since 1999 and above the 3.3% average for the past 10 years, Bloomberg said. Finally, a private survey of retailers found that sales rose a higher-than-expected 3.7% in January from a year earlier.

The Unemployment Rate for January fell to 5.2%, a three-year low, versus estimates of 5.4% and 5.4% in December. Average Hourly Earnings for January rose .2% versus estimates of a .2% increase and a .1% rise in December. The Change in Non-farm Payrolls for January was 146K versus estimates of 200K and a downwardly revised 133K in December. The Change in Manufacturing Payrolls for January was -25K versus estimates of 5K and a downwardly revised -7K in December. Average Weekly Hours for January was 33.7 versus estimates of 33.8 and 33.8 in December. "It's not a sign of weakness, the economy continues to create jobs," said Richard Yamarone, chief economist for Argus Research. The US economy is forecast to grow 3.6% this year versus an average rate of growth of 3% for the past 30 years, Bloomberg reported.

The Final Univ. of Mich. Consumer Confidence reading for January was 95.5 versus estimates of 96.0 and a reading of 95.8 in December. The Michigan numbers are sensitive to the financial markets, said Jashua Shapiro, chief US economist at Maria Fiorini Ramirez. Stock prices fell last month, trimming more than $400 billion from investment portfolios, according to Bloomberg data. As well, higher energy prices and colder weather likely dampened sentiment, Bloomberg said. January's reading of 95.5 still compares favorably to the average of 88.1 since a monthly version of the index began in 1978, Bloomberg reported. Finally, 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, surged to 110.9 from 106.7 in December.

Bottom Line: Overall, last week's economic data were mixed. Personal Incomes are improving, even excluding the one-time Microsoft dividend, which should continue to bolster Personal Spending as long-term interest rates remain near historic lows. Measures of inflation continue to decelerate. This trend should continue throughout the year as commodity prices remain stable-to-weaker and unit labor costs stay in check. I continue to believe home sales will remain strong, falling from historically high levels to a more sustainable pace as mortgage rates remain low, the consumer stays relatively healthy and supply holds steady. Measures of manufacturing activity are decelerating from very high levels, but should remain healthy. As well, construction activity will likely slow to more sustainable levels this year. Increased non-residential construction should offset any deceleration in homebuilding. Slowing US auto production, as a result of increased market share losses to foreign competition, will pressure economic growth in the near-term. While the Fed hiked rates and maintained their "measured pace" language as expected, there was more dovish language in their statements afterwards. I continue to believe the Fed will slow their pace of hikes in the next few months as economic growth slows, inflation decelerates and the US dollar stabilizes. While productivity is slowing, it will remain higher than historical norms of around 2.0%. A modestly improving labor market and decent productivity should prevent unit labor costs from rising enough to spur an acceleration of inflation. The Unemployment rate will probably fall to around 5% by year-end, a low level by historic standards, as job growth rises modestly, more parents stay home to raise children and an increasing number of kids attend college. The US services sector, which accounts for more than two-thirds of the economy, is slowing from very high levels to more sustainable rates, as well. Retail sales continue to surprise on the upside as interest rates remain low, confidence stays healthy, the labor market improves and Americans' net worth is at all-time high levels. Consumer Confidence should rebound over the coming weeks on more optimism after the Iraqi elections, on weakening energy prices and a rising stock market. The ECRI Weekly Leading Index rose slightly again and has now recouped almost all of its losses from a few weeks ago.

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