Sunday, May 08, 2005

Economic Week in Review

ECRI Weekly Leading Index 134.40 -.22%

Construction Spending for March rose .5% versus estimates of a .3% increase and a .5% gain in February. The rise in construction spending to a record $1.052 trillion annual rate was driven by increased work on new homes, factories and commercial buildings. Construction spending has risen every month since January of last year, the best performance on record. Moreover, for the first quarter, construction is up a very strong 9.3%(YoY), Bloomberg reported. "We still have tight inventories which tell builders to keep on building," said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi.

ISM Manufacturing for April fell to 53.3 versus estimates of 55.0 and a reading of 55.2 in March. ISM Prices Paid for April fell to 71.0 versus estimates of 71.2 and a reading of 73.0 in March. The production index component of the ISM, a measure of the work being performed, actually rose to 56.7 versus estimates of 56.5, Bloomberg reported. As well, the new export orders component of the index rose to 57.2 from 55.4. This report shows companies started paring inventories in April after slowing demand in the first quarter caused the fastest increase in stockpiles in about five years, Bloomberg said. "The trend is definitely toward a slower pace of growth," said Norbert Ore, chairman of the institute's manufacturing committee.

Factory Orders for March rose .1% versus estimates of a 1.2% decline and a downwardly revised .5% decrease in February. This report also showed orders for capital goods excluding aircraft, a gauge of future business investment rose 10.4% from the first quarter of 2004, Bloomberg said. "Underlying demand for some manufacturing products is still reasonably firm," said Adam Chester, chief economist at HBOS Treasury Services. The figures are consistent with an economy "reaching a more mature rate of expansion," Chester said.

The FOMC raised its benchmark rate 25 basis points to 3.0% versus estimates of a hike to 3.0% and 2.75% at the prior meeting. As well, the Fed restated a plan to carry out further increases at a "measured" pace to head off faster inflation. "Recent data suggest the solid pace of spending growth has slowed somewhat, partly in response to the earlier increase in energy prices," the Fed said. "The Fed isn't particularly worried that the slowdown is a serious one," said former Fed Governor Lyle Gramley, now an economic adviser at the Stanford Washington Research Group. The Fed jarred financial markets shortly before 4pm EST when it announced it had mistakenly left a sentence about inflation expectations being "well-contained" out of the statement earlier in the afternoon, Bloomberg reported.

Total Vehicle Sales for April rose to 17.5M versus estimates of 16.8M and 16.8M in March. Domestic Vehicle Sales for April rose to 13.9M versus estimates of 13.3M and 13.5M in March. Toyota Motor and Nissan Motor said US sales of cars and trucks soared more than 25% last month, while sales at GM and Ford declined. Asian companies now have a record 37.5% share of US auto sales, Bloomberg said. US consumers are shunning the less fuel-efficient sport-utility vehicles and trucks that make up the bulk of sales at GM and Ford, Bloomberg said. GM now has a 25.4% share of the US market so far in 2005, an 80-year low.

ISM Non-Manufacturing for April fell to 61.7 versus estimates of 61.0 and a reading of 63.1 in March. "Close to 60 should be viewed as exceptionally strong," said James O'Sullivan, a senior economist at UBS Securities. The ISM Non-Manufacturing is holding just under the 62.4 average for all of last year. This is an exceptionally strong level, considering services account for 85% of the US economy, Bloomberg reported. This index is also still near the all-time high that was set last year in April at 66.9. However, components within the index show a continuation of the recent deceleration is likely. Measures for new orders, order backlogs, inventories and employment were modestly weaker. Once again, another measure of inflation showed deceleration. The prices paid component of this index fell to 61.9 from 65.6 the prior month, Bloomberg reported.

Preliminary 1Q Non-farm Productivity rose 2.6% versus estimates of a 1.8% gain and a 2.1% increase in 4Q. Preliminary 1Q Unit Labor Costs rose 2.2% versus estimates of a 2.0% gain and a 1.7% increase in 4Q. "We've moved into a new era where productivity is permanently at a higher level," said Ellen Beeson.

The Unemployment Rate for April was 5.2% versus estimates of 5.2% and 5.2% in March. Average Hourly Earnings for April rose .3% versus estimates of a .2% increase and a .3% gain in March. The Change in Non-farm Payrolls for April rose to 274K versus estimates of 174K and an upwardly revised 146K in March. The Change in Manufacturing Payrolls for April fell 6K versus estimates of a decrease of 5K and a 7K decline in March. The strong payroll report was further bolstered by an upward revision of 93,000 more jobs created in February and March than previously thought, Bloomberg reproted. Stand-out sectors included an increase in retail employment of 24,000 in April after a decline of 2,100 in March. As well, construction jobs rose by 47,000 after an increase of 29,000 the prior month. "It is a surprisingly strong report, it's across the board, and it's good news for the economy," said William Ford, former president of the Atlanta Fed. The average weekly paycheck and the total number of hours worked per week rose by the most in eight years, Bloomberg reported.

Consumer Credit for March fell to $5.5B versus estimates of $6.4B and $5.8B in February. Borrowing by US consumers grew in March at the slowest pace in four months, as retail sales cooled and limited purchases by credit card, Bloomberg reported. More home-equity loans amid record housing prices may have helped restrain use of credit cards, economists said.

BOTTOM LINE: Overall, last week's economic data were positive. The record pace of new home sales and rising builder backlogs should spur further gains in construction and construction employment. This should cushion any economic weakness over the coming months. The modest decline in the ISM Manufacturing report was expected after the rise in inventories that was reported in the Preliminary 1Q GDP report. Considering the rise in commodity prices during the first part of the year, the declines in the ISM Manufacturing and Non-Manufacturing prices paid indices is a big positive and corresponds with the drop in the Chicago Purchasing Manager’s prices paid component. The first quarter rise in inventories may limit factory demand over the next few months. The .1% gain in factory orders is more evidence that economic growth is slowing to more sustainable and less inflationary levels. As of now, I continue to believe the Fed will slow their pace of rate hikes after the June meeting, notwithstanding the strong employment report. The strong gain in auto sales was in part due to consumers switching to more fuel efficient vehicles. This trend will likely slow in the second half of the year as gas prices decline. The headline number on the ISM Non-Manufacturing Index was stronger than the underlying components, suggesting a modest weakening in future reports. While Preliminary 1Q unit labor costs, which account for two-thirds of inflation, exceeded estimates slightly, investors focused more on the much better-than-expected productivity number. As long as productivity remains elevated, it is unlikely we will see unit labor costs rise substantially. As a result, hiring will remain modest by historic standards and inflation will remain well in check. While the April jobs report was strong, other indicators point to more moderate hiring in coming months. The sharp gain in construction hiring in April bodes well for an acceleration of new home starts. I continue to believe consumer spending will remain healthy throughout the year as interest rates stay low, stock performance improves, inflation decelerates, job prospects/incomes improve modestly, sentiment rises and gas prices fall. Finally, the ECRI Weekly Leading Index fell .22% to 134.40 and is forecasting slowing, but healthy levels of economic activity.

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