Sunday, August 07, 2005

Economic Week in Review

ECRI Weekly Leading Index 134.90 +.37%

Construction Spending for June fell .3% versus estimates of a .7% increase and a downwardly revised 1.7% fall in May. US construction spending unexpectedly declined for a fourth month as the pace of homebuilding slowed, Bloomberg reported. Construction spending is still 7.9% higher year-over-year. “The construction spending figures were not as weak as the headline decline might suggest, since the bulk of the pullback was again concentrated in the home improvement component,” said Stephen Stanley, chief economist at RBS Greenwich Capital.

ISM Manufacturing for July rose to 56.6 versus estimates of 54.5 and a reading of 53.8 in June. ISM Prices Paid for July fell to 48.5 versus estimates of 52.5 and a reading of 50.5 in June. US manufacturing accelerated for a second straight month in July to the best level of the year as gains in both orders and production signaled that factories may add more to economic growth this quarter, Bloomberg reported. The new orders component of index rose to 60.6 versus 57.2 in June. The prices paid component of the index fell to 48.5 last month, the lowest level in 3 years, from 50.5 the prior month. The employment component of the index rose to 53.2 versus 49.9 in June. Finally, the new export orders component rose to 55.9 from 50.4 in June. “The survey is clearly signaling an end to the industrial slowdown,” said Ian Shepherdson, chief US economist at High Frequency Economics. “This is a great start to the third quarter.”

Pending Home Sales for June rose .6% versus estimates of a .8% increase and an upwardly revised 1.5% decline in May. Contracts to buy previously owned US homes rebounded to the third highest level ever in June as buyers took advantage of the lowest long-term mortgage rates in 15 months, Bloomberg reported. The index increased .7% in the Midwest, 3.5% in the West, .4% in the South and fell 3.2% in the Northeast.

Personal Income for June rose .5% versus estimates of a .4% increase and a .2% gain in May. Personal Spending for June rose .8% versus estimates of a .8% gain and an unchanged reading in May. The PCE Core(MoM), the Fed’s favorite inflation measure, for June was unchanged versus estimates of a .1% gain and a .2% increase in May. Incomes are now up 6.6% over the last year, significantly higher than the rate of consumer inflation which is currently around the long-term average of 3.0%. The .8% gain in Personal Spending was the largest rise since July 2004. Spending on long-lasting items such as autos and furniture rose 3.3%, the most since May 2004. “These are very strong numbers and they bode well for the near-term economic outlook,” said David Resler, chief economist at Nomura Securities International.

Factory Orders for June rose 1.0% versus estimates of a 1.0% increase and an upwardly revised 3.6% gain in May. The current streak of factory gains is the longest since the November 1998 to February 1999 period. Orders for non-defense capital goods excluding aircraft, a measure of future corporate investment, rose 3.9% in June which was the largest gain since January. “With the strength in manufacturing and consumer spending, we think economic growth can average 4% in the second half of the year,” said James Knightley, an economist at ING Financial Markets. “Inventories have been driven so low that bringing them back up is going to spur production,” said John Herrmann, Director of Economic Commentary at Cantor Fitzgerald LP.

Total Vehicle Sales for July rose to 20.9M versus estimates of 18.3M and 17.5M in June. Domestic Vehicle Sales for July rose to 17.2M versus estimates of 14.5M and 14.1M in June. General Motors, Ford Motor and DaimlerChrysler, bolstered by employee discounts for all customers, led the second-biggest month ever for US auto sales, Bloomberg reported. GM said its US sales of cars and trucks rose 15%, while Ford posted a gain of 29% and DaimlerChrysler’s sales of Chrysler and Mercedes-Benz vehicles increased 25%. The three companies said they’ll continue to offer employee prices to customers through August. “When the employee-discount plans are removed, there will be a lull,” said Ford sales analyst George Pipas.

ISM Non-Manufacturing for July fell to 60.5 versus estimates of 61.5 and a reading of 62.2 in June. July sales at US services companies remained close to the three-month high reached in June, suggesting growth may accelerate in the second half of the year, Bloomberg reported. This gauge represents 87% of the US economy and is still near its all-time high of 66.9 set in April. The new orders component of the index rose to 61.9 from 59.5 the prior month. The backlogs component of the index rose to 53.5 from 52.5 and the export orders component rose to 53.5 from 50. “This is another indication that economic growth remains quite strong and is accelerating in the second half,” said Dean Maki, chief US economist at Barclays Capital.

The Unemployment Rate for July was 5.0% versus estimates of 5.0% and a reading of 5.0% in June. Average Hourly Earnings for July rose .4% versus estimates of a .2% increase and a .2% gain in June. The Change in Non-farm Payrolls for July was 207K versus estimates of 180K and an upwardly revised 166K in June. The Change in Manufacturing Payrolls for July was -4K versus estimates of -5K and -21K in June. US employers added 207,000 workers in July, a bigger increase than expected, suggesting companies are gaining confidence as the economy accelerates, Bloomberg reported. Moreover, the Unemployment Rate remained at 5.0%, near a 4-year low. An index of the number of industries hiring jumped to 62.9 in July, the highest since May 2004, Bloomberg said. Average monthly job growth is 191,000 this year versus 183,000 last year. “Short-term I’ve never seen a better economy,” said Barry Bosworth, senior economist at the Brookings Institute.

Consumer Credit for June rose to $14.5B versus estimates of $6.0B and an upwardly revised -$1.2B in May. Borrowing by US consumers rose in June by the most in eight months as Americans ran up credit card debt and financed new cars offered at discount prices, Bloomberg reported. Feeling wealthier as incomes and home prices rose, consumers kept borrowing and spending even as oil prices climbed, Bloomberg said. “The whole broad range of data suggest the consumer sector is in pretty good shape and strengthening,” said Patrick Fearon, an economist at AG Edwards.

BOTTOM LINE: Overall, last week's economic data were very positive. The recently passed highway bill should boost construction spending going forward. As well, increased commercial construction should offset any slowdown in residential building. There is now overwhelming evidence that manufacturing will add to economic growth going forward. The fact that the recent bounce in commodity prices has not resulted in any noticeable increases in the prices paid indices is a big positive. The rebound in pending home sales bodes well for future home sales, however a substantial moderation in home price appreciation is likely. The recent sharp jump in auto sales may temporarily damp consumer spending on smaller items. However, the strong ISM Non-Manufacturing report paints a healthy picture of the service sector going forward. An improving job market, a rising stock market and booming housing market are continuing to spurt consumer sentiment and spending. Rising incomes are one of the most underappreciated aspects of the current economic environment. The fact that the PCE Core, the Fed’s favorite inflation gauge, was unchanged in June is substantially positive. I continue to believe the Fed is currently raising rates to have ammunition for a future emergency and quell worries over housing froth, not because they are overly worried about inflation. However, if substantial employment gains persist and income increases accelerate, I will become more concerned about another acceleration of inflation readings. It is very likely the US economy will grow a robust 4%+ during the second half of the year. I continue to believe growth will slow early next year. Finally, the ECRI Weekly Leading Index rose .37% to 134.90 and is forecasting modestly accelerating healthy growth.

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