Saturday, June 25, 2005

Economic Week in Review

ECRI Weekly Leading Index 133.40 -.52%

Leading Indicators for May fell .5% versus estimates of a .3% decrease and an unchanged reading in April. The index of leading economic indicators fell for the fourth month in five, pulled down by a flattening of the yield curve. The University of Michigan’s Consumer Confidence Index fell in May which also contributed to the overall decline, however it has since rebounded. The Conference Board has stated that they believe a six-moth annualized decline of 3.5% or more would suggest imminent risk of recession. However, the six-moth annualized decline in May was 2.2%. "This is the fifth consecutive month of flat or down LEI numbers and this last happened ahead of the 1995 soft landing," said David Rosenberg, Chief North American Economist at Merrill Lynch. "The June LEI will rise, thanks to higher stock prices and consumer sentiment," said Ian Sheperdson, chief US economist at High Frequency Economics.

Initial Jobless Claims for last week fell to 314K versus estimates of 330K and 334K the prior week. Continuing Claims fell to 2600K versus estimates of 2600K and 2638K prior. The number of US workers filing first-time claims for jobless benefits fell more than expected as companies retained more of the productive workers who have led the economic recovery. The four-week moving average, a less volatile measure, fell 2,500 to 333,000, Bloomberg reported. "Growth is picking up, business conditions are improving and fewer companies are looking to trim staff at this point in the recovery," said Wesley Beal, chief US economist at IDEAglobal.com. "This report signals there's a good chance we'll see stronger employment growth in June." The four-week moving average of continuing claims fell to 2.603M from 2.596M, Bloomberg reported. "In the second half of an expansion, companies typically hold on to workers more closely as productivity gains slow and the pool of unemployed workers diminishes," said Michael Englund, chief economist at Action Economics. The insured unemployment rate, which tracks closely with the US unemployment rate, fell to 2.0% from 2.1% the week before last.

Existing Home Sales for May fell to 7.13M versus estimates of 7.15M and 7.18M in April. US sales of previously owned homes fell in May to the second-highest level on record, as low borrowing costs and rising incomes fueled demand and pushed prices to an all-time high, Bloomberg said. The median home sales price increased to $207,000 from $205,000 and is up 12.5% over the last 12 months. The supply of homes available for sale, another gauge of housing demand, rose to 4.3 months' worth in May from 4.1 months' worth the previous month, Bloomberg reported. "There clearly is some froth in some markets but we still don't see a nationwide housing bubble," said Fed Governor Olson.

Durable Goods Orders for May rose 5.5% versus estimates of a 1.5% increase and a 1.4% gain in April. Durables Ex Transportation for May fell .2% versus estimates of a .5% increase and a .7% decline in April. Orders for durable goods rose in May by the most in more than a year, mainly reflecting a surge in bookings for Boeing aircraft. With inventories fairly high and fuel costs rising, investment in new equipment may be slow to recover in coming months, Bloomberg said. At the current sales pace, manufacturers have 1.41 months of supply, unchanged from a month earlier and near a two-year high. Transportation equipment orders surged 21.2%, the most since July 2002, after rising 7.8% in April. Orders for non-defense capital goods excluding aircraft, a gauge of future business investment, fell 2.3% last month. However, unfilled orders, a proxy of future production rose 1.9%, the most since June 2000.

New Home Sales for May rose to 1298K versus estimates of 1320K and a downwardly revised 1271K in April. US new home sales rose to the second-best level in history, boosted by low mortgage rates and an improving job market. Prices declined 6.6%, the most since January 2003. The median price of a new home fell to $217,000 from $232,200 in April. The median price of a new home has increased 2.5% over the last 12 months. The National Association of Realtors said this year would be a record year for sales of both new and existing homes, beating last year’s records. Sales rose 22.9% in the Midwest and fell 24.5% in the Northeast. The supply of homes for sale was unchanged at 4.2 months in May, a relatively low level.

BOTTOM LINE: Overall, last week's economic data were modestly positive. The Leading Indicators is not as useful as other gauges, however it should not be ignored. At this point, it continues to forecast slowing growth, but not a recession. The labor market continues to improve at a moderate, choppy pace. This should hold unit labor costs in check. This month's payroll report should improve modestly over last month's. Home price appreciation appears to be moderating to more sustainable healthy rates. I continue to believe prices will consolidate at elevated levels for a few years rather than decline precipitously. Manufacturing activity is still sluggish and will likely remain that way for several more months. Finally, the ECRI Weekly Leading Index fell .52% to 133.40 and is forecasting moderately decelerating growth.

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