ECRI Weekly Leading Index 134.90 +.67%Personal Income for January fell 2.3% versus estimates of a 2.6% decline and a 3.7% increase in December. Personal Spending for January was unchanged versus estimates of a .1% increase and a .8% gain in December. The PCE Deflator(YoY) for January rose 2.2% versus estimates of a 2.2% increase and a 2.4% gain in December. The PCE Core(YoY) for January rose 1.6% versus estimates of a 1.5% increase and a 1.5% gain in December. While incomes fell 2.3%, distorted by a one-time dividend payout from Microsoft the prior month, wages and salaries rose, Bloomberg said. A drop in new vehicle sales during January, as automakers reduced discounts, held down spending. However, with take-home pay rising as employment improves, spending on other consumer goods should lift first-quarter growth, economists said. "Even though the consumer paused in January, we think we'll see a rebound in February," said Michael Englund, chief economist at Action Economics. The 1.6% rise in the PCE Core, Greenspan's favorite inflation gauge, is within the Fed's preferred range of 1.0-2.0%, Bloomberg reported.
New Home Sales for January fell to 1106K versus estimates of 1125K and an upwardly revised 1218K in December. The median sales price declined to $199,400 from $229,700, Bloomberg reported. The decline in prices was influenced by a change in the mix of sales reported, as purchases of so-called starter homes priced less that $150,000 accounted for a much greater percentage of the total. Of the 85,000 total new homes sold, 27.1% were starter-homes priced under $150,000, up from 18.8% the prior month. Measured against sales, the supply of new homes increased to 4.7 months, Bloomberg said. "We're plateauing," said Kevin Logan, senior market economist at Dresdner Kleinwort Wasserstein. "Sales and construction are topping out, just at a high level," Logan said.
The Chicago Purchasing Manager Index for February rose to 62.7 versus estimates of 60.5 and a reading of 62.4 in January. The index remains near the 16-year high of 67.7 set in October of last year. Chicago-area business unexpectedly grew at an accelerated pace in February, as orders and employment picked up and the prices paid component of the index fell to 70.1, the lowest since February 2004, Bloomberg said. Moreover, the employment index rose to 57.7 from 52.8 in January, Bloomberg reported. "We saw good consumer spending in the second half of last year, and business spending on equipment is very strong," said Robert Mellman, an economist at JP Morgan.
Construction Spending for January rose .7% versus estimates of a .4% increase and a 1.2% gain in December. US construction spending rose to a record $1.047 trillion at an annual rate, as residential, commercial and public building increased, Bloomberg said. Construction spending has now increased for 12 straight months, the longest period of continuous expansion since record keeping began in 1993, Bloomberg reported. "It's almost preordained by the literally off-the-charts housing starts number in January," said James Smith, chief economist at the Society of Industrial and Office Realtors. Housing starts rose 4.7% in January to a 21-year high, the Commerce Department reported last month.
The ISM Manufacturing Index for February fell to 55.3 versus estimates of 57.0 and a reading of 56.4 in January. The ISM Prices Paid Index for February fell to 65.5 versus estimates of 68.0 and a reading of 69.0 in January. The ISM Manufacturing Index is just below the 60.5 average of last year, the highest annual average since 1973, Bloomberg said. US corporate leaders plan to invest more as confidence in the economy rises to the highest level in at least two years, a survey of CEOs found. "Manufacturing has settled into a nice, steady growth pace," said Joel Naroff, president of Naroff Economic Advisors.
Total Vehicle Sales for February rose to 16.3M versus estimates of 16.6M and 16.2M in January. Domestic Vehicle Sales for February were 13.0M versus estimates of 13.3M and 13.0M in January. Sales of Ford's Escape, the No.2 US automaker's compact sport-utility vehicle, pulled ahead of its larger Explorer sibling for the first time about two months ago at Woodhouse Ford, a dealership in Blair, Nebraska. "People are not going after the big SUVs here because gas prices are just staying too high, and this is truck country," said Woodhouse sales manager Kitzelman. SUV buyers' growing preference for more fuel-efficient models is costing US manufacturers sales and market share, Bloomberg said. Toyota, the world's second-largest automaker, reported an 11% increase in February US sales, Bloomberg reported.
Final 4Q Non-farm Productivity rose 2.1% versus estimates of a 1.5% increase and a prior estimate of a .8% gain. Final 4Q Unit Labor Costs rose 1.3% versus estimates of a 1.8% increase and a prior estimate of a 2.3% rise. Productivity from July through December rose an average 1.7%, less than half the pace in the year's first six months, Bloomberg reported. Businesses can no longer depend on efficiency gains alone to meet demand and are hiring more and boosting hours to keep up, Bloomberg said. "This downward revision in unit labor costs in the fourth quarter is actually good news, and it's all the more reason for the Fed to keep raising rates at the sort of slow, measured pace they have been talking about," said Stewart Hoffman, chief economist at PNC Financial.
The ISM Non-manufacturing Index for February rose to 59.8 versus estimates of 60.0 and a reading of 59.2 in January. "Businesses are becoming less cautious and more confident, and that is being reflected in more hiring and investing," said James O'Sullivan, a senior economist at UBS Securities. The hiring component of the index rose to 59.6, the highest since the survey began in July 1997, Bloomberg said. The index of prices paid by companies for materials and services dropped to 66.4, the lowest since March 2004, Bloomberg reported. "Things look pretty good out there right now," said Jeffrey Taylor, CEO and founder of Monster Worldwide. Monster's index of on-line job advertising rose to a record 122 during February, Bloomberg said. Retailers helped push up the ISM Non-manufacturing Index as consumers began to spend tax refunds. Wal-Mart Stores said February sales at US stores open at least a year rose a brisk 4.1%, the most in nine months, Bloomberg reported. Sales gains in March will be "similar to or better than February," Wal-Mart said. The average tax refund is 9.2% larger so far this year, according to IRS data.
The Change in Non-farm Payrolls for February was 262K versus estimates of 225K and a gain of 132K in January. The Change in Manufacturing Payrolls for February was 20K versus estimates of 7K and a loss of 20K in January. The Unemployment Rate for February rose to 5.4% versus estimates of 5.2% and a rate of 5.2% in January. Average Hourly Earnings for February were unchanged versus estimates of a .2% increase and a .3% gain in January. Average Weekly Hours for February were 33.7 versus estimates of 33.8 and 33.7 in January. "You're getting good job growth but it's coming without any wage pressures, which is actually good news for the financial markets and good news for the Fed," said Kathleen Bostjancic, senior economist at Merrill Lynch. "The bond market can exhale a small sigh of relief that its worst fears of a total blowout number were not realized," said Stephen Stanley, chief economist at RBS Greenwich Capital. Employment gains and higher tax refunds should continue to boost consumer spending, Bloomberg said. The US economy grew at a 4.4% rate last year, the fastest pace since the height of the stock market bubble in 1999, and is forecast to expand 3.6% in 2005 according to the median estimate of economists surveyed by Bloomberg News. The year's projection exceeds the 3.0% a year average for the past 30 years, Bloomberg said.
The Final University of Michigan Consumer Confidence reading for February was 94.1 versus estimates of 94.5 and a prior estimate of 94.2. Gasoline prices reached a three-month high at the end of February and the debate over the US Social Security system may have created anxiety about the future, Bloomberg said. However, a rebound in stock prices and a stepped-up pace of hiring in February helped sustain optimism, Bloomberg said. "The overall economic picture is better, but the news that influences consumer confidence is a mixed bag," said Joshua Shapiro, chief economist of MFR Inc. The Consumer Confidence reading doesn't always reflect consumer's true mindset, Bloomberg said. Sales at US retailers surged 4.9% in February, the biggest gain in nine months, according to the International Council of Shopping Centers. Retailers from discounters Wal-Mart Stores and Kohl's to luxury chain Neiman Marcus Group beat analysts' estimates with the aid of job growth and spring fashions, Bloomberg reported. CEOs are also more confident about the US economy, according to a survey released March 1 by The Business Roundtable. 82% said they expected hiring to increase or remain the same the next six months and 60% plan new investments in plants and equipment, Bloomberg reported.
Factory Orders for January rose .2% versus estimates of a .1% decline and an upwardly revised .5% increase in December. Orders for capital goods excluding aircraft, a proxy for future business investment, rose strong 2.9%, Bloomberg reported. Rising business spending to update equipment and restock inventories is helping boost orders and demand for workers, economists said. "It's a strong start for the quarter and for the year," said Stuart Hoffman, chief economist at PNC Financial Services. "Spending on equipment is very strong right now. Business investment overall is quite strong right now," Hoffman said.
Bottom Line: Overall, last week's economic data were positive. The Microsoft dividend during December of last year makes it difficult to judge January's personal income and spending reports. A number of measures of inflation showed deceleration in last week's data. The Chicago Purchasing Manger Prices Paid Index, ISM Manufacturing Prices Paid Index and ISM Non-manufacturing Prices Paid Index all fell, while the PCE Deflator and Unit Labor Costs rose at a slower pace than originally estimated. The overcapacity generated during the 90's and global competition still makes it incredibly hard for companies in many sectors to raise prices. The airline, telecom, auto, technology and retail sectors are some of the main areas still facing immense pressure to keep prices low. The downward revision to 4Q Unit Labor Costs is a big positive, considering these costs comprise roughly two-thirds of inflation. As long as unit labor costs remain well in check the Fed is unlikely to accelerate their pace of rate hikes. At this point I am not concerned by the decline in home sales. Many parts of the country, specifically California, are experiencing one of the wettest winters on record. In my opinion, it is a positive for the economy that more lower income and first-time home buyers are entering the market, which appeared to be the case in January. I continue to believe home sales will fall modestly this year, but remain high by historic standards as the labor market improves, long-term interest rates stay low and supply remains tight. A strong housing market and an improving commercial real estate market should continue to propel construction spending throughout 2005. Manufacturing appears to be accelerating, which should boost inventory rebuilding and GDP growth over the next few months. I had expected 4Q/04 growth stole from 1Q/05 growth, but this does not appear to be the case. This bodes very well for another strong year for the US economy. Auto dealers are beginning to boost incentives again after recent sales declines which should also help spur GDP growth. If energy prices remain high, further loss of market share is likely to Asian competitors. Retailers reported very good sales in February which is especially positive considering January's strong reports, negative political rhetoric and the rise in gasoline prices. The low-end and high-end were strong as employment prospects appear to have improved across the board. I would like to see future non-farm payroll gains of around 200K, which would likely prevent unit labor costs from accelerating to inflationary levels and keep unemployment low. I expect Consumer Confidence to rise modestly in the near-term as an improving labor market, rising stock prices, improving geopolitical situations and low interest rates mostly offset the effects of higher gas prices and negative political rhetoric. Finally, the ECRI Weekly Leading Index rose .67% to 134.90, approaching cycle highs set in April 2004.
