Saturday, February 12, 2005

Economic Week in Review

ECRI Weekly Leading Index 134.40 +.52%

Consumer Credit for December fell to $3.1 billion versus estimates of $8.0 billion and $2.0 billion in November. Borrowing slowed as the Fed raised rates to 2.25% in December from 1% in June to stem inflation fears. The US central bank raised rates another quarter point this month and said further increases may come at a "measured" pace, Bloomberg reported. Weaker-than-expected December consumer-borrowing figures, following lackluster job-creation figures on Friday, may give Fed Chairman Greenspan margin to pause the increase in interest rates, said Mike Englund, chief economist at Action Economics. For the year, consumer borrowing rose 4.6%, the fastest annual increase since 2001, Bloomberg said.

Wholesale Inventories for December rose .4% versus estimates of a .9% increase and a 1.2% rise in November. Consumer spending in the last six months of 2004 rose at the fastest pace in almost five years, government reports last month showed. The gains kept stockpiles from becoming bloated, leaving wholesalers room to boost inventories in coming months and increase orders to manufacturers, Bloomberg said. "Inventories haven't been running far ahead of sales and therefore aren't excessive by any means," said Douglas Porter, a senior economist at BMO Nesbitt Burns. Wholesaler sales last year surged 13.8%, the biggest gain in history, Bloomberg reported. As well, the latest string of monthly rising wholesaler sales surpassed the record of 18 consecutive gains, which ended in August 1973, Bloomberg said. Rebuilding inventories may contribute .3 percentage points to GDP this quarter after adding .4 percentage points to growth in the previous three months, according to a forecast by economists at Lehman Brothers.

The Trade Balance for December came in at -$56.4 billion versus estimates of -$57.0 billion and -$59.3 billion in November. The biggest drop in the price of oil since early 1991 contributed to the narrowing trade deficit, Bloomberg said. These numbers follow Fed Chairman Greenspan's comment last week that deficits may shrink as the declining value of the dollar makes US exports more competitive, Bloomberg said. "I'm optimistic that we'll see more of an improvement, but it's only one month and I'd like to see a few more," said Glenn Haberbush, an economist at Mizuho Securities. "As other economies continue to improve, that will help, but consumption in the US is still extremely strong, so the quantity of imports will remain about the same." The trade deficit with China narrowed to $14.3 billion from $16.6 billion. US exports to China for all of last year rose to an all-time record of $35 billion.

Initial Jobless Claims for last week fell to 303K, the lowest level in more than four years, versus estimates of 325K and 316K the prior week. Continuing Claims for last week rose to 2737K versus estimates of 2700K and 2690K prior. Consumer Confidence rose to a six-month high in January as Americans said they were more optimistic about finding work and the unemployment rate fell to a three-year low, the Conference Board said Jan. 25. The economy created 2.2 million jobs for all of 2004, the most in five years, as companies added workers to meet demand as the economy expanded 4.4%, the fastest since 1999, Bloomberg reported. "Unemployment is working its way down," Fed Governor Gramlich told a business group last week. "We would like to see it move a little faster, but it is moving in the right direction."

The Monthly Budget Statement for January was $8.7 billion versus estimates of $10.0 billion and -$1.4 billion in December. The US Treasury reported a budget surplus in January, helped by a jump in quarterly tax payments from corporations and individuals, Bloomberg said. "The budget deficit is on the mend, and this is good news for the US," said Christopher Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi. Tax revenues rose 9.2% in the month to $202.2 billion from a year earlier, led by a 53% gain in corporate income tax receipts, Bloomberg reported. Moreover, the addition of more than 2 million workers to payrolls last year contributed to an 11% rise in income tax receipts, which totaled $110 billion in January, Bloomberg said. Finally, for the first four months of this fiscal year, the deficit totaled $109.2 billion, down 17% from the first four months of the previous fiscal year, according to Bloomberg.

Bottom Line: Overall, last week's economic data were positive. As long as consumer borrowing remains relatively healthy, a decline is welcome. High levels of consumer debt have been one of the bears' main focal points. A deceleration in the rate of recent inventory gains may take from economic growth in the near-term, however inventory rebuilding will likely add to GDP in subsequent months as sales remain relatively robust. I expect the trade deficit to improve throughout the year as the US dollar remains near current levels, spending slows from last year's blistering pace and energy prices decline further. Jobless claims have fallen noticeable over the last few weeks which is a big positive for consumer spending. However, I am closely monitoring the labor market for any signs that unemployment has reached such low levels as to result in a substantial rise in unit labor costs, the largest component of inflation. At this time, I continue to foresee modest improvements in the job market which should continue to spur consumer spending while holding inflation in check. US government tax receipts have rebounded substantially as the US economy grew last year at the fastest pace of all the world's industrialized nations. The US budget deficit should continue to shrink this year as income tax receipts, capital gains tax receipts and sales tax receipts continue to rise while government spending decelerates. Finally, the ECRI Weekly Leading Index rose again and has now more than recouped all of its late December/early January losses. It currently stands at the highest level since May of 2004.

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