ISM Non-Manufacturing for August rose to 65.0 versus estimates of 60.0 and a reading of 60.5 in July. Growth at US service companies unexpectedly accelerated in August, suggesting the economy was strong even as energy prices rose before Hurricane Katrina struck, Bloomberg said. The new orders component of the index rose to 65.8, the highest in two years. Export orders soared from 53.5 in July to 63.5. The prices paid component of the index fell to 67.1 from 70.3 in July. Finally, the employment gauge rose to 59.6 from 56.2 in July. “The economy had a lot of momentum before the hurricane,” said James O’Sullivan, a senior economist at UBS Securities. “September numbers are going to be a lot weaker just because of the local hit to Alabama, Mississippi and Louisiana. More likely it will prove to be a temporary weakening.
Final 2Q Non-farm Productivity rose 1.8% versus estimates of a 2.1% increase and a 2.2% prior estimate. Final 2Q Unit Labor Costs rose 2.5% versus estimates of a 1.4% gain and a 1.3% prior estimate. US worker productivity grew at a slower-than-expected pace from April through June and labor costs accelerated, which may prompt the Fed to keep raising interest rates, Bloomberg reported. “This is an argument for the Fed raising rates. We expect they’ll continue to do so even with the effects of the hurricane,” said David Sloan, senior economist at 4Cast Inc.
The US economy expanded in the six weeks before Hurricane Katrina struck, led by car sales and tourism, the Fed’s Beige Book report stated. Eleven of the 12 Fed districts reported increased economic growth, Bloomberg reported. “Growth was widespread,” the report said. “A few districts reported softening in residential real estate markets, albeit from still brisk levels,” Bloomberg reported. Forecasts for US economic growth are being pared back after the hurricane. The effects of the storm, especially rising energy costs, may slow growth by as much as a full percentage point during the second half of the year, according to the Congressional Budget Office.
Initial Jobless Claims for last week fell to 319K versus estimates of 315K and 320K the prior week. Continuing Claims fell to 2593K versus estimates of 2582K and 2598K prior. The number of Americans filing first-time claims for jobless benefits fell to 319,000 last week, as people thrown out of work by Hurricane Katrina weren’t able to apply for benefits, Bloomberg said. According to the CBO, Hurricane Katrina may cost the US economy 400,000 jobs this year. The four-week moving average of jobless claims rose to 318,500 from 316,500 the prior week. The insured employment rate, which tracks the US unemployment rate, was unchanged at 2%. “We do expect a surge in claims to the 360,000 to 380,000 area over the weeks ahead,” said Mike Englund, chief US economist at Action Economics LLC in Boulder, Colorado.
Wholesale Inventories for July fell .1% versus estimates of a .6% increase and a .4% gain in June. Stockpiles at US wholesalers unexpectedly fell in July for the first time in more than a year, led by a drop in supplies at computer-equipment, metals and pharmaceutical companies, Bloomberg said. Drug stockpiles fell 4.9%, the most on record. The inventory-to-sales ratio fell to 1.18 months, the lowest since April. “There will be a rebound in inventories, but it probably won’t happen in September because of Katrina,” said Mike Englund.
Consumer Credit for July fell to $4.4B versus estimates of $10.0B and $14.6B in June. Borrowing by US consumers increased for a second month in July as Americans financed new cars at discounted prices, Bloomberg reported. “Consumer credit growth, which does not include mortgage related debt, has growth very slowly over the last several year,” said Stephen Stanley, chief economist at RBS Greenwich Capital. “People are refinancing their mortgages and paying down credit card debt and people are in better financial shape.”
The Import Price Index for August rose 1.3% versus estimates of a 1.4% gain and a .8% increase in July. Prices of goods imported into the US rose in August by the most in five months as crude oil costs climbed even before Hurricane Katrina struck the Gulf Coast, Bloomberg said. The price of crude hit a record the day after Katrina struck. The cost of most other imported industrial goods and consumer products either declined or were mostly unchanged. Excluding petroleum, prices were up 1.8% year-over-year, the smallest increase since March 2004. As well, excluding energy, import prices have now fallen over the last four months. Moreover, the price of goods from China has declined 1.3% over the last 12 months. “Take out all the fuels, and import prices have fallen in the last four months, and that’s a lovely performance,” said Kevin Harris, chief economist at Informa Global Markets
BOTTOM LINE: Overall, last week's economic data were mixed. The ISM Non-Manufacturing was surprisingly strong. However, the negative effects of Katrina will hurt future readings for several months. The 2.5% increase in unit labor costs is still below the long-term average of a 3.4% quarterly increase. Hurricane rebuilding could temporarily push labor costs to unacceptable levels. I expect initial jobless claims to begin spiking next week as Katrina victims are able to file. Inventories should begin increasing again as port problems in Louisiana improve over the coming weeks. Consumer credit will remain subdued in the near-term as recent spending on autos and homes is digested. With the exception of commodity prices, most costs are well contained. This is likely the reason the 10-year T-note yield remains low even with the effects of Katrina. Looking past the temporary inflationary effects of Katrina, bond investors see decelerating inflation readings once again. The full impact of Katrina is hard to gauge at this point. US GDP growth, which was set to rise at a torrid 4.5%+ during the third quarter, will now likely rise around 3.0% due to the hurricane. The fact that energy prices are now below pre-Katrina levels, leads me to believe the Fed is less likely to “pause” after the Sept. meeting. Finally, the ECRI Weekly Leading Index rose .44% to cycle highs of 135.90 and is forecasting stable healthy growth. However, this reading will likely begin turning lower next week.
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