ECRI Weekly Leading Index 134.40 +.52%Factory Orders for May rose 2.9% versus estimates of a 3.0% gain and a .7% increase in April. US factory orders rose by the largest amount in a year, due mainly to a surge in commercial aircraft orders. However, demand for business equipment declined for a third month in four. As well, orders for non-defense capital goods excluding aircraft, a measure of future business investment, fell 2.5% in May after gaining 1.7% in April. "The weakness in manufacturing in the spring was because of excess inventories, that's mostly over at this point," said Stephen Stanley, chief economist at RBS Greenwich Capital. "The soft ex-aircraft result isn't as much a concern because the ISM rebounded in June, so for now it looks like growth in manufacturing will pick up well in the third quarter," said Wesley Beal, chief US economist at IDEAglobal.com.
ISM Non-Manufacturing for June rose to 62.2 versus estimates of 58.7 and a reading of 58.5 in May. The ISM Non-Manufacturing Index, a measure of the health of service companies which compose the largest part of the US economy, exceeded estimates and a measure of hiring accelerated. The employment component of the index rose to 57.4, the highest in 4 months. The export orders component of the index fell to 50 from 62. The prices paid index rose slightly to 59.8 from 57.9. "It's clear that energy prices aren't slowing business activity," said Michael Moran, chief economist at Daiwa Securities. "If you look at an ideal economy, this is about it right now," said Mitchell Stapley, chief fixed-income strategist at Fifth Third Asset Management. "We have economic growth at about 3.5% probably on average for the rest of the year, the unemployment rate at 5.1% and consumer inflation probably running about 2.0%," Stapley said.
Pending Home Sales for May fell 2.0% versus estimates of a .5% increase and a 3.1% gain in April. Contracts to buy previously owned US homes fell in May for the first time in four months while remaining close to a record. The May number was the third highest in US history. The level of pending re-sales suggests rising prices may be discouraging some prospective buyers, however home buying remains very strong by historic standards. "We might not go much higher with monthly home sales, but we're still on a record pace for the year," said Gina Martin, an economist at Wachovia. "To put this index in perspective, we're running about 25 percentage points higher than what is considered to be historically strong," said David Lereah, the National Assoc. of Realtors' chief economist.
The Unemployment Rate for June fell to 5.0% versus estimates of 5.1% and a 5.1% rate in May. Average Hourly Earnings for June rose .2% versus estimates of a .2% increase and a .2% gain in May. The Change in Non-farm Payrolls for June was 146K versus estimates of 200K and an upwardly revised 104K in May. The Change in Manufacturing Payrolls for June was -24K versus estimates of -5K and -6K in May. US employers added 146,000 workers in June and the unemployment rate fell to the best level since the 9/11 terrorist attacks in 2001. Wage gains are helping boost consumer spending. Wages and Salaries were up 7% in May from the same time last year, more than twice the rate of inflation. Retailers from Wal-Mart to Nordstrom posted their biggest sales gain in 13 months in June even with high gas prices, according to the International Council of Shopping Centers. Monthly job gains in 2005 have "been in the neighborhood of 180,000, and that's comparable to what it was a year ago, which was a very good growth year," said Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. "Job growth isn't too strong or too weak – we're not trying to achieve an economic recovery anymore, we're just trying to sustain things," said Barry Bosworth, a senior economist at the Brookings Institution.
Wholesales Inventories for May rose .1% versus estimates of a .5% increase and a .7% gain in April. Rising imports in three of the first four months of the year spurred warehouse construction and suggest inventory expansion continues to support economic growth. The amount of time wholesale goods went unsold, known as the inventory-to-sales ratio, was unchanged from April at 1.18 months. "We're going to see a little bit of an inventory correction from the accumulation in the first quarter," said Glenn Haberbush, an economist at Mizuho Securities.
Consumer Credit for May fell to -$3 billion versus estimates of $4.1 billion and $1.2 billion in April. Borrowing by US consumer unexpectedly fell in May by the most since December 1990. The drop was led by non-revolving debt, such as car loans, which fell the most in 13 years. "Often in months where you have a lot of mortgage-refinancing activity, you see a decline in consumer debt because of debt substitution," said Steven Ricchiuto, chief economist at ABN Amro.
BOTTOM LINE: Overall, last week's economic data were modestly positive. US economic growth, which had been slowing to around 3%, appears to be accelerating to an above-average 3.5% rate. I continue to believe manufacturing will remain mixed-to-weaker over the near-term. However, strong consumer spending will likely boost factory activity over the intermediate-term. The elevated ISM Non-manufacturing reading bodes well for a continuation of recent healthy economic data. A period of consolidation is likely near with respect to home price increases. However, a significant nationwide decline in home values is unlikely. The 146,000 gain in payrolls is within the preferred range of 100,000-150,000. This will keep unemployment moving gradually lower without spurring significant gains in unit labor costs which would cause inflation to accelerate. I expect inventory building to increase later in the year as companies gain confidence in a continuation of the current healthy economic expansion and automakers' inventories stabilize. Finally, the ECRI Weekly Leading Index rose .52% to 134.40 and is forecasting moderately accelerating growth.
