Sunday, February 20, 2005

Economic Week in Review

ECRI Weekly Leading Index 134.30 unch.

The Empire Manufacturing Index for February fell to 19.19 versus estimates of 20.0 and a reading of 20.08 in January. The gauge held close to its six-month average, suggesting factories are producing just enough to meet demand and keep inventories in line with purchases, Bloomberg said. "As long as consumers continue to spend, the wheels of the US economy are going to turn and that will allow manufacturing to expand," said Glenn Haberbush, an economist at Mizuho Securities. The survey's hiring index for the next six months rose to 26.1 from 22.9, Bloomberg reported. However, the unfilled orders component of the index fell to negative 12.2 from 5.57. "Anything that suggests factories are slowing doesn't gibe with what we're seeing," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. Finally, the measure of prices manufacturers paid for materials fell to 48.8 from 50.4, while the index of prices received dropped to 13.2 from 27.7.

Advance Retail Sales for January fell .3% versus estimates of a .4% decline and a 1.1% increase in December. Retail Sales Less Autos for January rose .6% versus estimates of a .4% increase and a .3% rise in December. The .6% increase, led by department stores and apparel retailers, was the biggest since October. Job and income gains are fueling consumer spending, Bloomberg said. Retailers including Target, Nordstrom and American Eagle Outfitters reported stronger-than-expected demand in January. Retail sales account for almost half of all consumer spending, which in turn accounts for about two-thirds of the US economy, Bloomberg said. Consumer spending this year is estimated to rise a strong 3.5%, according to the median estimate of 68 economists surveyed by Bloomberg from January 31-February 7. "We have now seen enough positive signs in the economy to have some confidence that it is on course for sustained growth," said Janet Yellen, president of the Fed Bank of San Francisco.

Net Foreign Security Purchases for December fell to $61.3B versus estimates of $58.5B and an upwardly revised $89.3B in November. International investors accumulated US assets in December as their appetite for US corporate bonds and government securities remained strong. Taking November and December data together, "this is the best two-month performance since early 2003 and is associated with improving sentiment towards the US economy," said Steven Englander, a currency strategist at Barclays Capital. Treasury Secretary Snow told the US Congress last week that the budget gap will narrow and that the trade imbalance reflects the desire of foreigners to invest in US assets as well as weak economic growth abroad, Bloomberg reported.

Business Inventories for December rose .2% versus estimates of a .2% increase and a 1.1% gain in November. The .2% rise was outpaced by a 1% increase in sales that kept supplies at record lows. "You have an economy that has learned to control inventories in the business cycle," said John Silvia, chief economist at Wachovia Corp. The elevated pace of consumer and corporate spending may lead to increased orders at factories as they rebuild inventories, Bloomberg said.

The NAHB Housing Market Index for February fell to 68 versus estimates of 69 and a reading of 70 in January. US homebuilder optimism declined for a second month in February as wet weather discouraged buyers and delayed projects, Bloomberg said. "When you get that kind of weather, people don't go shopping for homes and you have more inventory to sell," said Kevin Harris, chief economist at Informa Global Markets. Rainfall last month averaged .43 inches more than the 1895-2005 average, according to the National Climatic Data Center. Moreover, states in the Southwest region experienced the third wettest January on record. Job growth and a shortage of land will help spur sales and limit the restraining effects of higher mortgage rates this year, Bloomberg said. "Builders are still expressing very positive views of the conditions in the housing market," said David Wilson, president of the NAHB.

Housing Starts for January rose to 2159K versus estimates of 1925K and an upwardly revised 2063K in December. Building Permits for January rose to 2105K versus estimates of 2000K and an upwardly revised 2069K in December. US housing starts unexpectedly rose to a 21-year high in January, paced by record construction of single-family homes, Bloomberg reported. Payroll growth and mortgage rates averaging less than 6% are fueling demand after the best year for home sales ever in 2004, Bloomberg said. "There's no reason to believe housing cannot have another record year," said Richard Yamarone, chief economist at Argus Research. "People have been saying the sky is falling for many years now, and housing continues to be solid and steady," said Ara Hovnanian, CEO of Hovnanian Enterprises. "I don't think we're going to exceed 2004, nor do I see a big fall-off this year," he said. The South saw the strongest gains as construction soared 19%, Bloomberg said. However, starts fell 24% in the Northeast. "We've got the best of both worlds right now," said Donald Tomnitz, chief executive of DR Horton. "There are jobs being created, incomes are up, unemployment is down and mortgage rates have dropped." Finally, the average rate on a 30-year fixed mortgage fell to 5.71% in January from 5.75% in December. Rates remain within a percentage point of their all-time low of 5.21% in June of 2003.

Industrial Production for January was unchanged versus estimates of a .3% increase and a .7% gain in December. Capacity Utilization for January was 79.0% versus estimates of 79.3% and 79.1% in December. Production at US factories, mines and utilities was unchanged last month, held back by a decline in energy demand, Bloomberg reported. January was warmer and wetter than average, contributing to a 3% decline in utility production. "Excluding autos, manufacturing is actually looking very healthy in January," said Chris Low, chief economist at FTN Financial. US automakers Ford and GM have said they're cutting back on production in the first quarter to reduce inventories as sales in January fell, Bloomberg said. Capacity Utilization rose 2.3 percentage points last year, the biggest increase since a 2.7-point gain in 1994.

The Import Price Index for January rose .9% versus estimates of a .6% increase and a 1.4% decline in December. Prices of goods imported into the US increased in January for the first time in three months, led by higher costs for oil, Bloomberg said. Excluding petroleum, the measure of the costs of goods and raw materials from abroad increased .2 percent after a .4 percent rise the previous month, Bloomberg reported. As well, prices for imported autos and parts fell .1%, the first decline since September 2003 and food prices dropped .2% after a .8% increase the prior month, Bloomberg said. In testimony before Congress, Greenspan forecast the core personal consumption expenditures price index, his favorite inflation gauge, would rise between 1.5% and 1.75% this year, Bloomberg reported.

Initial Jobless Claims for last week fell to 302K versus estimates of 315K and 304K the prior week. Continuing Claims fell to 2717K versus estimates of 2710K and 2731K prior. The number of Americans filing first-time unemployment claims unexpectedly fell to the lowest in more than four years, supporting Fed Chairman Greenspan's view that the US economy is growing at a "reasonably good pace." Greenspan told Congress the US is benefiting from low inflation and interest rates, even as growth slows from last year's very strong pace, Bloomberg reported. Investors considered that statement a sign that the central bank may continue to raise borrowing costs at a "measured pace," Bloomberg said. "Claims this low indicate demand for new hires is picking up," said Wesley Beal, chief US economist at IDEAglobal. "We may have a big job creation number in our future," he said.

Leading Indicators for January fell .3% versus estimates of a .2% decline and a .3% increase in December. This was the first decline in three months as consumer confidence lagged and stock prices slumped, Bloomberg said. "The decline in January was partly related to weaker manufacturing activity and the drop in consumer confidence," said Elisabeth Denison, a US economist at Dresdner Kleinwort Wasserstein. "I'm looking beyond the weak headline number which probably won't be repeated in February," she said. "Leading indicators has been thrown off in the last year by the fact that the Fed eased so aggressively through the last recession," said Michael Englund, a senior economist at Action Economics. "Declines now are inevitable, but are not reflective of a downturn," he said.

Philadelphia Fed. for February rose to 23.9 versus estimates of 17.0 and a reading of 13.2 in January. "We're really bouncing back from January," said Michael Englund. A gauge of prices paid by manufacturers dropped to 43.5, the lowest since February 2004, from 66.1 in January. As well, the index of prices manufacturers received for their goods declined to 24.6 this month from 24.7 in January, Bloomberg reported. "It still speaks to cost pressures but not nearly what we saw in January," said Michael Trebing, senior economic analyst at the Philadelphia Fed bank.

The Producer Price Index for January rose .3% versus estimates of a .3% increase and a .3% decline in December. PPI Ex Food & Energy for January rose .8% versus estimates of a .2% increase and a .2% gain in December. The increases were led by higher costs for cigarettes, vehicles and business equipment, Bloomberg said. Manufacturers and other producers, struggling with rising costs for energy and other raw materials, are attempting to raise prices to maintain profits, Bloomberg said. "There is an inflation risk, not an inflation problem," said Ken Mayland, chief economist at ClearView Economics. Passenger car prices rose 1.2% in January, the most since March 2003. The industry's incentive spending per vehicle fell to an average $4,143 in January from $4,320 the previous month, Bloomberg reported. However, Ford Motor stepped up incentives last week with 5-year, no-interest loans on Explorer sport-utility vehicles and some F-Series pickups, matching GM after sales of the two largest US automakers spurred the decline, Bloomberg reported. Philip Morris raised prices 10 cents a pack on 22 brands of cigarettes effective January 16, the first list-price increase since April 2002. Cigarette producers have been raising prices and cutting discounts after Congress last year mandated they pay $9.7 billion to buy out tobacco farmers hurt by declining demand, Bloomberg said. Finally, computer prices plunged 6.1% last month, the most since August 2001.

The preliminary Univ. of Mich. Consumer Confidence Index for February fell to 94.2 versus estimates of 95.5 and a reading of 95.5 in January. US consumer sentiment fell for the second straight month in February as the debate over changes to the Social Security system eroded confidence, Bloomberg said. "Consumers are concerned about long-term issues, and there's been a lot of discussion about Social Security," said Reaser, chief economist at Banc of America Capital Management. "Confidence is still at a moderately good level that will support consumer spending," he said. The university's index of current conditions, which reflects Americans perceptions of their financial situation and whether it's a good time to make big purchases, held steady at 110.9, Bloomberg reported.

Bottom Line: Overall, last week's economic data were positive. Manufacturing activity appears to be accelerating to stronger levels after a brief respite. Consumer spending was very strong in January, spurred by the redemption of holiday gift cards. I expect spending to slow from last year's exceptional levels, but to remain healthy. Foreign demand for US assets should remain solid as sentiment towards the liberation of Iraq improves, the US dollar remains stable, US growth outpaces other industrialized nations and long-term interest rates stay low. Inventory rebuilding should add to economic growth over the next few months as sales remain brisk. I continue to expect the housing market to remain strong as mortgage rates stay low and the labor market continues to improve. In my opinion, Greenspan's recent use of the word "conundrum" to describe low long-term interest rates was a direct attempt to cool down the housing market. Measures of inflation gave a mixed picture last week. However, I continue to believe consumer inflation will decelerate this year from last year's average levels. The recent improvement in jobless claims bode well for future employment readings. Consumer Confidence should bounce back over the next few months as gasoline prices decline, political rhetoric loses its bite, the labor market continues to improve and long-term interest rates remain low by historical standards. The decline in the Leading Indicators for January doesn’t worry me as the ECRI Weekly Leading Index remained unchanged, staying at its highest level since May of 2004. While I expect US economic growth to hit a "soft patch" again at some point this year, it does not appear imminent.

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