Vital Signs for the Week of Dec. 15


The economy may finally be running on all cylinders. While consumers have been keeping it afloat over the past three years, businesses are beginning to spend as well. That's particularly good news for the manufacturing sector. The Federal Reserve will release its November data on industrial output on Tuesday, and economists surveyed by Informa Global Markets see a solid 0.5% monthly increase in output.

Business investment in tech equipment appears to the main driver. In October, production in high-technology industries -- such as computers, semiconductors, and telecom equipment -- was up 20.6% from a year ago.

There are also signs that other parts of the manufacturing sector are seeing better days. Indeed, both national and regional surveys of manufacturing activity are looking quite strong. However, pricing power is likely to remain elusive for many manufacturers. Producer prices fell 0.3% in November, and consumer prices are expected remain tame as well.

STEADY FED. Meanwhile, the housing sector remains resilient. November new home starts are forecast to ease, but from a record high in October. And the Federal Reserve reiterated after its Dec. 12 monetary policy meeting that it's in no hurry to raise the federal funds rate, currently at 1%. That should continue to benefit the housing market in the form of lower interest rates.

However, a stronger economy could begin gradually pull up long-term rates higher. That would raise mortgage rates and have a cooling effect on the housing demand. Indeed, mortgage-refinancing activity is already sharply down from mid-year levels.

In addition, rising government and foreign-trade deficits could potentially force interest rates higher. The current account was probably smaller in the third-quarter than in the past two periods, but as a share of gross domestic product it should still stand above 5%.

In the past, a mark of more that 3% has often provoked questions about a nation's ability to finance its international obligations, and when its currency begins to weaken. That means interest rates may have to rise in order to keep enough foreign investment coming in to finance the deficits. If so, it would be a further drag on the housing sector.

Here's the week's economic calendar:

EMPIRE STATE MANUFACTURING SURVEY

Monday, Dec. 15, 10 a.m. EST

The New York Federal Reserve Bank will release its December survey of business conditions for manufacturers in the New York Fed district. The headline manufacturing activity index hit another record high of 41, after establishing an all-time high in October of 34.1. The new orders and shipments indexes jumped to record levels in November as well, reaching 41.37 and 37.6, respectively. The November index tracking future expectations moved ahead, reaching 67, from 65.7 in October.

MEETING OF NOTE

Monday, Dec. 15, 12:30 p.m. EST

Federal Reserve Bank of Richmond President Alfred Broaddus speaks about the U.S. economy at the Charlotte Chamber of Commerce in Charlotte, North Carolina.

HOME BUILDERS SURVEY

Monday, Dec. 15, 1 p.m. EST

The National Association of Home Builders will release its December survey results, which will update housing market conditions by measuring builders' assessments of current sales, buyer traffic through model homes, and expected demand. The November index fell back to 69, from 72 in October, the highest reading in over three years. The index of single-family home sales jumped to remained strong at 78, from 79 in October. The biggest decline came in the index tracking traffic of prospective buyers, which fell to 46, from 52 in the previous month.

BTM/UBSW STORE SALES

Tuesday, Dec. 16, 7:45 a.m. EST

This weekly tracking of retail sales will update buying activity for the week ended Dec. 13. In the week ended Dec. 6, seasonally adjusted sales plunged 2.5%, after slipping 0.1% for the period ended Nov. 29, and a 0.4% gain for the period ended Nov. 22. While the 0.9% gain in monthly retail sales for November point to a solid start to the holiday shopping season, the weekly store sales figures show some weakness.

CONSUMER PRICE INDEX

Tuesday, Dec. 16, 8:30 a.m. EST

Consumer prices for all goods and services probably inched up by 0.1% in November. That's based on the median forecast of economists surveyed by Informa Global Markets. Consumer prices were unchanged in October, following gains of 0.3% in both September and August.

During October, consumer prices were up 2.0% from the same period a year ago. Yearly inflation would remain at that pace, given the November forecast. Excluding food and energy, prices most likely posted a similar 0.1% rise, after rising 0.2% in October and 0.1% in both September and August. Based on the expected 0.1% monthly rise, yearly core inflation would hold at 1.3% in November.

REAL EARNINGS

Tuesday, Dec. 16, 8:30 a.m. EST

Inflation-adjusted weekly earnings of production workers over November most likely rose 0.3%, based on the month's 0.4% rise in average weekly earnings and the forecast 0.1% increase in the consumer price index for November. Real earnings in October jumped 0.5% from September, and were up by a similar 0.5% from the same period a year ago.

NEW RESIDENTIAL CONSTRUCTION

Tuesday, Dec. 16, 8:30 a.m. EST

Housing starts probably eased to annual rate of 1.92 million in November, according to the median forecast of economists surveyed by Informa Global Markets. October housing starts hit a new record of 1.96 million at an annualized rate, after climbing to a pace of 1.91 million in September, from 1.83 in August. The Federal Reserve confirmed after its Dec. 12 Federal Open Market Committee meeting that it will maintain its accommodative monetary policy.

Many economists believe the U.S. central bank will keep the federal funds rate at 1% through the first quarter of 2004. If the Bank does move in line with expectations, the housing sector should be able to avoid a hard landing. As it stands now, 2003 should be a banner year for housing starts. Through October, starts in 2003 stand at an average annual rate of 1.8 million, on pace to exceed the 1.7 million level of 2002.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, Dec. 16, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the second fiscal week of December, ended Dec. 13. During the first three fiscal weeks of December, ended Dec. 13, sales were off 1% compared to the same period in November. For the full fiscal month of November, sales were off 2.8% compared to October.

INDUSTRIAL PRODUCTION

Tuesday, Dec. 16, 9:15 a.m. EST

Industrial output probably increased by a solid 0.5% during November, say economists surveyed by Informa Global Markets. In October, factory output expanded 0.2%, after a 0.5% jump in September. The average operating rate for all industries is expected to have inched up to 75.3%, from 75% in October.

Inventories fell in the third quarter, drawn down by a jump in demand. Economists now expect businesses to have started rebuilding inventories, which should lift industrial production. That belief is supported by recent national and regional manufacturing activity surveys. Indeed, the November national survey of factory activity from the Institute for Supply Management hit 62.8%, the best reading since 1983.

MEETING OF NOTE

Tuesday, Dec. 16, 9:30 a.m. EST

The Energy Information Administration releases its annual projections of U.S. energy supply and demand through 2025 in Washington, D.C.

CURRENT ACCOUNT

Tuesday, Dec. 16, 10 a.m. EST

The current account deficit -- a kind of cash-flow statement of U.S. international business, including trade in goods and services, net investment income, and foreign transfers -- probably narrowed to $136 billion in the third quarter, after coming in at $138.7 billion in both the first and second quarters, from $128.6 billion in the fourth quarter of 2002. During the second quarter of 2002, the current account stood at $122.8 billion.

The forecast $136 billion deficit would be about 5.5% of the gross domestic product, off from the recent peak of 5.8% of GDP in the first quarter. However, foreign investors are still apprehensive about the current account and federal government's deficits. Concern about America's ability to finance these deficits is a big reason the U.S. dollar is expected to keep falling against the euro and other major currencies.

MEETING OF NOTE

Wednesday, Dec. 17, 7 a.m. EST

The Energy Dept. hosts a summit with energy ministers from over 20 countries. The purpose is to examine the state of the liquid natural gas (LNG) market, including both economic and public policy issues. The Summit is particularly timely as U.S. natural gas prices have shot up 69%, to over $6.70 per BTU since the end of October. The two-day Summit will be in Washington, D.C.

MORTGAGE APPLICATIONS

Wednesday, Dec. 17, 7 a.m. EST

The Mortgage Bankers Assn. releases its weekly tally of mortgage applications for both home buying and refinancing for the week ended Dec. 12. During the week ended Dec. 5 the purchase index dropped to 399.8, from 441.8 for the week ended Nov. 28, and 459.9 for the period ended Nov. 21. The latest reading of the four-week moving average through Dec. 5 managed to rise to 431.9, from 425.8 for the period ended Nov. 28.

The refi index also declined, dropping to 1775.5, from 2100 during the week ended Nov. 28, 2612.2 for the week ended Nov. 21. The refi index four-week moving average through Dec. 5 slid to 2132.9, from 2210.1 in the previous period. The average rate on a conventional 30-year mortgage, according to HSH Assoc., rose to 6.18% in the week ended Dec. 5.

MEETING OF NOTE

Wednesday, Dec. 17, 11:30 a.m. EST

The Minneapolis Federal Reserve Bank holds a news conference its 2004 economic outlook in Minneapolis.

JOBLESS CLAIMS

Thursday, Dec. 18, 8:30 a.m. EST

First-time claims for jobless benefits for the week ended Dec. 13 probably slipped to 372,000, according to the median forecast of economists surveyed by Informa Global Markets. Jobless claims climbed to 378,000 for the week ended Dec. 6, from 365,000 over the week ended Nov. 29. The four-week moving average inched up to 364,750 for the week ended Dec. 6, from 362,500 for the week ended Nov. 29. During the week ended Nov. 29, continuing claims rose to 3.35 million, from 3.34 million for the week ended Nov. 22.

LEADING INDICATORS

Thursday, Dec. 18, 10 a.m. EST

The Conference Board's composite report of leading economic indicators for November very likely improved by 0.3%, say economists surveyed by Informa Global Markets. In October, the index rose 0.4%, after holding steady in September. An improving picture for manufacturers and smaller levels of initial jobless claims are likely to push the index higher, with some drag by the falling level of money supply.

PHILADELPHIA FED SURVEY

Thursday, Dec. 18, 12 p.m. EST

The Philadelphia Federal Reserve Bank will release its December survey of business conditions in the mid-Atlantic region. According to economists surveyed by Informa Global Markets, the index of general business conditions probably stayed virtually unchanged to 25.8.

In November, the Philly Fed index moved lower, to 25.9, from 28 in October, and 14.6 in September. While the index is expected to fall for a second straight month, the level is still quite positive. Also encouraging was the employment index, which remained in positive territory at 3.3, after climbing to 5.5 in October. The outlook for the coming six months rebounded to 63.4, from 55.5 in October.

As part of the November survey, the Philly Fed asked the region's manufacturers whether they are gaining or losing business against foreign competitors and if they have increased or decreased outsourcing work. Over 54% of respondents said they lost domestic customers over the past three years to foreign competition, compared to just 2.3% who said they have gained customers. And 70.8% of those surveyed stated they have upped their outsourcing, with no respondents claiming to have reduced outsourcing. By James Mehring in New York


Steve Ballmer, Power Forward
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