Advance Retail Sales for November rose .1% versus estimates of a .1% decline and a .8% increase in October. Retail Sales Less Autos for November rose .5% versus estimates of a .3% increase and a 1.1% gain in October. "There certainly appears to be no sign of a consumer retrenchment," said David Greenlaw, chief U.S. fixed income economist at Morgan Stanley, who raised his estimate for spending this quarter to a 3.7% annual rate. "Usually the holiday season isn't defined until the week leading into Christmas and the week after Christmas" when people start cashing in gift cards, said National Retail Federation spokesman Scott Krugman. Purchases excluding gasoline, building materials and cars, the category used by the Commerce Department to gauge personal consumption in its GDP report, rose .4% in November after rising .8% for two months in a row, Bloomberg reported. The economy has created an average of 185,450 jobs/month so far this year, the best since 1999, helping fuel incomes and spending, Bloomberg said.
Industrial Production for November rose .3% versus estimates of a .2% increase and a .6% gain in October. Capacity Utilization for November was 77.6% versus estimates of 77.8% and 77.5% in October. "Demand for industrial goods has gotten stronger," said Sandy Cutler, chief executive officer of Eaton Corp. "If you look at machine goods builders currently, you're seeing lead times spread out."
Federal Reserve policy makers raised the benchmark US interest rate a quarter point to 2.25% and restated a plan to carry out further increase at a "measured" pace to keep inflation in check, Bloomberg reported. "Labor market conditions continue to improve gradually," the Fed said. "Inflation and longer-term inflation expectations remain well contained" and "output appears to be growing at a moderate pace despite the earlier rise in energy prices." "It really looks good for the rate of inflation in 2005," said Wayne Angell, of Angell Economics. The Fed also said it will begin releasing minutes of meetings three weeks after they take place, instead of six.
Empire Manufacturing for December rose to 29.93 versus estimates of 20.0 and a reading of 18.86 in November. "Things are brightening up for the early part of next year," said Michael Gregory, a senior economist at BMO Nesbitt Burns. The bank's measure of new orders soared to 40.2 from 16.9, the highest level in the three-year history of the survey, Bloomberg said. As well, the index of unfilled orders rose to 10.4 from -1.4 the month before. "Shipments and orders are up, and we are seeing some companies hiring more to handle the increased demand," said Randall Wolken, president of the Manufacturers Assoc. of Central NY. Consumer demand and corporate spending to replace aging equipment are fueling production as inventories near historic lows, Bloomberg reported. "The economy is now in very good shape," said Harvard University economist Martin Feldstein.
The NAHB Housing Market Index for December rose to 71 versus estimates of 70 and a reading of 70 in November. The NAHB last week raised its forecasts for new home sales this year to an ALL-TIME record of 1.18 million, Bloomberg said. "The combination of an improving economy and historically low interest rates are sustaining housing activity," said Jayanth Nazareth, an economist at JP Morgan Chase. "We see very strong demand patterns across the country in most major housing markets," said Stuart Miller, CEO of homebuilder Lennar.
Housing Starts for November fell to 1771K versus estimates of 1980K and an upwardly revised 2039K in October. Building Permits for November fell to 1988K versus estimates of 2000K and an upwardly revised 2018K in October. The decline in housing starts is not the beginning of substantial weakness in housing, economists told Bloomberg. November's starts declined from the best month of the year in October, when builders kicked into high gear following summer hurricanes. Building permits fell just 1.5% in November and a recent survey showed builders are the most optimistic in five years, Bloomberg reported. "There definitely is a rising backlog and that is because demand and contracts are exceeding the ability to produce," said Robert Toll, CEO of Tolls Brothers.
Initial Jobless Claims fell to 317K last week versus estimates of 342K and 360K the prior week. Continuing Claims were 2737K versus 2787K prior. Initial Jobless Claims dropped to the lowest level since July 3 and showed the largest weekly drop in three years, Bloomberg said. Companies are holding onto more workers and increasing hiring to meet demand. "It's getting incredibly difficult for companies to squeeze more out of what they've got and so it's becoming increasingly important for companies to hire," said Chris Low, chief economist at FTN Financial. 24% of US employers surveyed by Manpower Inc. expect to add to their staff from January through March of 2005, up from 20% who said they would do the same during the first quarter of this year.
The Philadelphia Fed. for December rose to 29.6 versus estimates of 20.5 and 20.7 in November. Lean inventories and rising sales suggest factories will need to boost production in coming months, Bloomberg said. The US dollar's decline since its mid-May high is contributing to demand for US products, by making exports cheaper, economists told Bloomberg. "There's every reason and hope that manufacturing will be really strong in 2005" unless the US dollar strengthens considerably, said Joel Naroff, president of Naroff Economic Advisors. The Philly Fed's new orders index rose to 26.4 from 22.1. The measure of shipments rose to 32.0, the highest since August, from 24.5. The index of unfilled orders rose to 7.7, the first positive reading in three months, from minus 1.2, Bloomberg reported. The prices-paid component fell to 52.2 from 53.9. The prices-received index fell to 20.0 from 28.0, Bloomberg said. Finally, a gauge measuring the average workweek rose to 18.6, a 10-month high.
Consumer Price Index for November rose .2% versus estimates of a .2% rise and a .6% gain in October. CPI Ex Food and Energy rose .2% in November versus estimates of a .2% increase and a .2% rise in October. Economist project the CPI to rise 3.3% this year, below the 3.4% rate in 2000 and slightly higher than the long-term average rate of 3.0%, Bloomberg said. The cost of all goods including cars, apparel and food fell .1% last month. President Bush's economic advisors recently predicted the decline in energy prices will bring inflation down to about 2% in 2005, Bloomberg reported. UBS Securities' economists recently projected all consumer prices to rise 1.7% next year as energy prices decline, Bloomberg reported.
Bottom Line: Overall, last week's economic data were positive. The Weekly Leading Index is now at its highest level since the first week of May. Retail sales are solid and will likely improve over the next few weeks. Internet retail continues to exhibit exceptional strength. Industrial production is continuing at healthy levels. I expect the Fed to pause after a 25 basis point hike on Feb. 2 and to raise rates less than currently expected in 05. Measures of manufacturing continue to accelerate from their pre-election lull. Inventory rebuilding and strong demand will likely keep manufacturing at relatively high levels for the next few months. At this point, I am not worried about the decline in housing starts from record-high levels. I expect long-term rates to fall modestly during the first half of 05 which should help maintain brisk demand. The labor market is healthy and continues to improve at a modest rate. This results in a muted increase in unit labor costs, thus holding inflation in check. Consumer inflation, currently near long-term average levels, should decelerate next year as commodity prices fall.