Vital Signs for the Week of Jan. 12


The economic reports scheduled for release this week should mitigate the disappointing results of the December employment report. That should be especially true for manufacturing. A host of data covering the factory sector this week wraps up with the Federal Reserve's December industrial production index on Friday. Economists surveyed by Informa Global Markets expect output by factories, utilities, and mining grew 0.7%, following a stout 0.9% gain in November.

The latest employment report showed another decline in factory payrolls, falling by 26,000. That figure doesn't fit with the latest data from factory-activity reports. Indeed, this week will show whether or not the differences widen.

The Federal Reserve Banks of Richmond, New York, and Philadelphia all release their regional surveys. In December, both the Philly and New York Fed reports indicated further improvements in the job market. And manufacturers in all three areas reported an optimistic view of the labor situation for the upcoming six months.

TIME TO RESTOCK. The better times for manufacturers are a result of increasing demand both by consumers and businesses. After a slow start, holiday sales picked up with plenty of last-minute shopping. Indeed, the retail sales report is expected to show a solid gain in December. And consumer spending will get a boost in the first half of 2004. According to Goldman Sachs, after-tax income is expected to swell by $40 billion dollars as a result of President Bush's last round of tax cuts passed last year.

In addition to businesses ramping up capital-investment projects, there are early signs that they are confident enough about the future to build up inventories. Companies relied on inventories to meet surge of demand in the third quarter. However, with fourth quarter economic growth apparently outpacing initial expectations and a rosier view for 2004, companies need to restock their warehouses.

Of course, increased demand won't be fully met by American companies. While a weakening U.S. dollar appears to be helping exports, especially manufacturers, the rising tide of imports is unlikely to crest. Evidence of that is expected to come in the November U.S. trade report. Economists surveyed by Informa Global Markets believe the deficit for goods and services rose for a third straight month.

FED ON HOLD. Even though the economy is experiencing an acceleration in growth, there is still plenty of excess capacity out there. The current amount of factory capacity in use -- 75.7% in November -- is still far below the 30 year average through 2002 of 81.3%. That's making it hard for businesses to increase prices despite a sharp rise in the cost of commodities.

Consumer inflation remains tame at a yearly pace of 1.8%, while producer prices of finished goods are up 3.9% from last November. The limited ability of businesses to push through higher costs of production onto customers is one reason why the Federal Reserve isn't expected to raise interest rates any time soon.

Here's the week's economic calendar:

MEETING OF NOTE

Monday & Tuesday, Jan. 12-13

U.S. President George W. Bush participates in a two-day Special Summit of the Americas. The special conference is to be held in Monterrey, Mexico, and will include members of the Organization of American States. Topics of discussion are expected to include economic and democratic reforms, including President Bush's recent proposal for a temporary worker program.

ICSC-UBS STORE SALES

Tuesday, Jan. 13, 7:45 a.m. EST

This weekly tracking of retail sales, now assembled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ending Jan. 10. In the week ended Jan. 3, seasonally adjusted sales slipped 0.1%, following a 2% jump for the week ended Dec. 27, and 0.6% increase over the period ended Dec. 20.

The recent trend in this measure of retail sales has been quite similar to the 2002 holiday season. If the pattern holds, moderate gains should be expected for the rest of January.

IMPORT AND EXPORT PRICES

Tuesday, Jan. 13, 8:30 a.m. EST

Import prices in December most likely rose 0.4%, say economists surveyed by Informa Global Markets. In November, import prices rose 0.4%, after holding steady in October, and declining 0.5% in September. A 1.1% increase in the cost of petroleum pulled the November headline figures higher. Excluding petroleum imports, prices rose by a smaller 0.3%.

With crude oil prices popping above $33 per barrel for a short time in December, oil will probably be the primary driver of import prices once again. And there are no signs that oil will slip lower in the immediate future. The Organization of Petroleum Exporters is not expected increase production before its Feb. 10 meeting in Vienna.

Meanwhile, export prices during November jumped 0.5%, following a 0.3% monthly gain in October, and a 0.4% rise in September. Export prices continue to rebound, climbing 1.8% from a year ago in November. Big gains in agriculture prices are one reason. Meat exports were up 42.6% from a year ago. However, there should be some downward pressure in the near future, given the recently discovered case of Mad Cow Disease.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, Jan. 13, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the first fiscal week of January, ending Jan. 10. For the entire fiscal month of December, sales were off by 1% compared to the same period in November. For the full fiscal month of November, sales were off 2.9% compared to October.

RICHMOND FED SURVEY

Tuesday, Jan. 13, 10 a.m. EST

The Richmond Federal Reserve Bank will release its December survey of business conditions in the Richmond Fed district. The manufacturing activity index moderated to 11 in November, from 20 in the month prior, but stayed far above the -7 reading of September. While the region's manufacturers said activity decelerated, there are positive signs that conditions will continue to improve. The index for new orders zoomed up to 14, from 6 in October. The index tracking unfilled orders increased to 3 in November, from -1 in October, and -14 in September.

Respondents in the region also felt prospects for the next six months were getting better, with the expectations index climbing to 41, from 33 in both October and September.

MEETINGS OF NOTE

Tuesday, Jan. 13, 11 a.m. EST

Federal Reserve Board Chairman Alan Greenspan speaks on globalization to a Bundesbank event in Berlin.

Tuesday, Jan. 13, 12 p.m. EST

Federal Reserve Board Governor Mark Olson discusses the economic outlook at the Charlotte City Club in Charlotte, N.C.

Tuesday, Jan. 13, 5:30 p.m. EST

Federal Reserve Bank of Cleveland President Sandra Pianalto gives a speech entitled, "Behind the Scenes of the Federal Open Market Committee: The Process of Policy," at Kent State University in Kent, Ohio.

MORTGAGE APPLICATIONS

Wednesday, Jan. 14, 7 a.m. EST

The Mortgage Bankers Assn. releases its tally of mortgage applications for both home buying and refinancing for the week ended Jan. 9. During the period ended Jan. 2, the purchase index rebounded weakly, 401.3, from 390.1 in the previous week. The latest reading of the four-week moving average through Jan. 2 managed to reach 410.1, from 409.7 for the period ended Dec. 26. The recent downward trend has not been due to rising mortgage rates. The average rate on a conventional 30-year mortgage, according to HSH Assoc., stayed below the 6% mark, at 5.98%, in the week ended Jan. 2.

The refi index also managed a small gain, climbing to 1755.4, from 1644.3 over the week ended Dec. 26, and 1908.3 during the week ended Dec. 19. The refi index four-week moving average through Jan. 2 fell to 1845.2, from 1850.3 for the prior period.

INTERNATIONAL TRADE

Wednesday, Jan. 14, 8:30 a.m. EST

The U.S. trade deficit for goods and services during November is expected to have hit $41.9 billion, say economists surveyed by Informa Global Markets. In October, the deficit came in at $41.8 billion, after a $41.3 billion deficit in September. Through October, the U.S. trade deficit stands at $409 billion, far ahead of last year's $337.1 billion deficit through the first 10 months.

The weakening dollar and an uptick in global economic growth may be having a positive effect on exports. Exports were up 3.3% compared to the first 10 months of 2002. One encouraging sign for manufacturers is the 3.2% gain in goods exports through October.

At the same time, though, the surge in U.S. demand is being satisfied with greater levels of imports, despite currency trends. Imports during 2003 are up 8.6% through the first 10 months, compared to the same period in 2002.

PRODUCER PRICE INDEX

Wednesday, Jan. 14, 8:30 a.m. EST

According to the median forecast of economists surveyed by Informa Global Markets, producer prices of finished goods most likely posted a slim increase of 0.2% in December, after a 0.3% fall in November. Using the December forecast, producer prices would be up 3.9% from a year ago, compared to a yearly gain of 3.4% in November.

Excluding food and energy costs, core prices over December probably crawled 0.1% higher, after sliding 0.1% in November. Based on the December number, core producer prices would be up 1.2% from the same period a year ago.

Producer price inflation is running at a faster pace than consumer prices. So far, however, there still appears to be limited pricing power for companies. At the ground level of production, crude material prices were up 18.3% from last November. Prices of intermediate goods, such as synthetic fibers and paperboard, were only up 3.3% over the same period. Businesses are still having a tough time passing along higher commodity prices to their customers.

MEETINGS OF NOTE

Wednesday, Jan. 14, 9 a.m. EST

Federal Reserve Bank of Philadelphia President Anthony Santomero gives opening remarks at a conference hosted by the Philly Fed. on reinventing older communities. The conference will be held in Philadelphia.

Wednesday, Jan. 14, 12:30 p.m. EST

Federal Reserve Board Governor Ben S. Bernanke discusses monetary policy in a low interest rate environment at the International Center for Money & Banking Studies in Geneva, Switzerland.

BEIGE BOOK

Wednesday, Jan. 14, 2 p.m. EST

The Federal Reserve will release its compilation of regional economic activity, based on survey responses from each of its 12 districts. The Beige Book comes in advance of the upcoming two-day policy meeting scheduled for Jan. 28-29. The latest speeches by Fed officials, including those at the American Economic Association's annual meeting earlier this month by Federal Reserve Board Chairman Alan Greenspan and Federal Reserve Board Governor Ben S. Bernanke, signal little chance of a rate hike early this year.

MEETING OF NOTE

Thursday, Jan. 15, 8:15 a.m. EST

Federal Reserve Bank of Atlanta President Jack Guynn speaks about the outlook for the U.S. economy to the Buckhead Business Assn. in Atlanta.

JOBLESS CLAIMS

Thursday, Jan. 15, 8:30 a.m. EST

First-time claims for jobless benefits for the week ended Jan. 10 most likely eased to 350,000, say economists queried by Informa Global Markets. Jobless claims moved up to 353,000 for the week ended Dec. 3, from a 339,000 for the week ended Dec. 27. The four-week moving average dropped to the lowest level since February, 2001, to 350,000, from 355,800 for the week ended Dec. 27. During the week ended Dec. 27, continuing jobless retreated to 3.27 million, from 3.29 million for the period ended Dec. 20.

RETAIL SALES

Thursday, Jan. 15, 8:30 a.m. EST

December retail sales are expected to have grown 0.8%, following a solid 0.9% gain in November. That's the median forecast of economists surveyed by Informa Global Markets. Based on the December estimate, fourth-quarter retail sales growth probably cooled to an annualized rate of 3.8%, from 11.5% in the third quarter. A slowdown was expected for the period. Excluding vehicles, December sales probably rose by 0.4% for a third straight month.

The forecast is buttressed by the solid annual pace of 17.9 million vehicles sold in December. However, gas stations could be a drag. Since sales are based on value, not volume, cheaper gasoline prices during the month may mean a smaller contribution from gas stations.

CONSUMER PRICE INDEX

Thursday, Jan. 15, 8:30 a.m. EST

Consumer prices for all goods and services probably increased 0.2% in December, based on the median forecast of economists queried by Informa Global Markets. Consumer prices fell 0.2% in November, after holding steady in October, and rising 0.3% in September.

During November, consumer prices were up 1.8% from the same period a year ago. Yearly inflation would inch up to 1.9% using the December forecast. Excluding food and energy, prices most likely posted a smaller 0.1% rise, after declining by 0.1% in November, the first monthly drop in core inflation since late 1982. Based on the expected 0.1% monthly rise, yearly core inflation would hold at 1.1% in December, the lowest yearly level since 1963.

The November dip was unexpected, led by a 3% monthly drop in energy prices. Natural gas prices heated up over the month and oil prices remained stubbornly high, eliminating any chance that such a fall will occur again in the December report. However, costs for services also slipped 0.2% in November, with medical care and housing inflation gradually easing.

The consumer inflation data provide little impetus for the Federal Reserve to act on interest rates. Several economists don't see any action by the Fed all year, pointing to subdued inflation due to excess capacity and the upcoming Presidential election.

REAL EARNINGS

Thursday, Jan. 15, 8:30 a.m. EST

Inflation-adjusted weekly earnings of production workers over December most likely fell 0.6%, based on the month's 0.4% drop in average weekly earnings and the forecast 0.2% increase in the consumer price index for December. Real earnings in November increased 0.6% from October, and were up 2.4% from the same period a year ago.

EMPIRE STATE MANUFACTURING SURVEY

Thursday, Jan. 15, 10 a.m. EST

The New York Federal Reserve Bank will release its January survey of business conditions for manufacturers in the New York Fed district. The Informa Global Markets median forecast calls for a solid reading of 36.5. The headline manufacturing activity index was strong in December, coming in at 37.4 after recording a record high of 41.1 in November. The new orders index slipped to 31.2, from 40.5. But backlogged orders swelled, with a December level of 11.63, compared to 1 in November.

The December indexes tracking expectations for the next six months were optimistic. The index tracking general business conditions inched up to 66.8. The outlook for new orders and employment moved ahead as well.

MEETING OF NOTE

Thursday, Jan. 15, 11 a.m. EST

Federal Reserve Bank of Kansas City President Thomas Hoenig takes part in a panel discussion on the economy and technology in Boulder, Colo.

PHILADELPHIA FED SURVEY

Thursday, Jan. 15, 12 p.m. EST

The Philadelphia Federal Reserve Bank will release its January survey of business conditions for the mid-Atlantic region. Economists surveyed by Informa Global Markets say the index of general business conditions will most likely come in at 29.8. That would be down slightly from the December reading of 32.1, but above the November level of 25.9. The outlook for the coming six months fell to 52.3, from 63.4 in November. That's still an optimistic level. The index tracking future expectations hadn't broken 60 since 1993.

Among the other business indicators, new and backlogged orders rose sharply in December. The employment index jumped to 21.9, from 3.3 in the previous period, indicating a growing willingness to add new workers. Plus, over a fifth of respondents said the average workweek lengthened in December, a good sign that further hiring by manufacturers in the region is likely.

MEETINGS OF NOTE

Thursday, Jan. 15, 7:30 p.m. EST

Federal Reserve Bank of Philadelphia President Anthony Santomero speaks on the outlook for the U.S. economy before the South Jersey Bankers Assn. in Cherry Hill, N.J.

Thursday, Jan. 15, 7:30 p.m. EST

Federal Reserve Bank of Richmond President Alfred Broaddus discusses the U.S. economic outlook before the Richmond Chapter of the Risk Management Association in Richmond, Va.

BUSINESS INVENTORIES

Friday, Jan. 16, 8:30 a.m. EST

Inventories held by manufacturers, wholesalers, and retailers probably grew 0.1% during November, according to Informa Global Markets. In both October and September, business inventories rose 0.4%. Already, factory inventories were reported to have fallen 0.2% for November, while wholesale inventories climbed by a healthy 0.5%.

Using the November forecast, inventories probably rose at an annualized rate of 2.5% over the fourth quarter, after a drop of 1.5% in the prior period. The inventory-to-sales ratio will most likely stay near 1.35. With low inventory levels and the surprising jump in demand in the third quarter, inventory rebuilding probably got under way last quarter.

INDUSTRIAL PRODUCTION

Friday, Jan. 16, 9:15 a.m. EST

Industrial output in December is expected to have increased by 0.7% say economists surveyed by Informa Global Markets. November factory output expanded by a healthy 0.9%, following an upwardly revised 0.4% gain during October. Based on the December forecast, fourth-quarter industrial production would be growing by an annualized clip of 6.7%, the biggest since the second period of 2000. Industrial output increased 3.8% in the third quarter.

The average operating rate for all industries probably nudged up to 76.1%, from 75.7% in November. Three hard years have caused manufacturers to practically halt any expansion of production capacity. In November, industrial capacity was up just 1.1% from a year ago, down dramatically from the 4.1% average annual rate over the past eight years. As factories begin to hum again, excess capacity should steadily disappear.

CONSUMER SENTIMENT INDEX

Friday, Jan. 16, 10 a.m. EST

The University of Michigan's Survey Research Center will report to its clients its initial index reading of consumer sentiment for January. News services will then report the index. Economists surveyed by Informa Global Markets say the first measure of consumer sentiment in 2004 probably rebounded to 93.5. In December, the index finished at 92.6, from 93.7 in November. The December result was surprising given the rally in stocks, positive economic news, and the capture of former Iraqi leader Saddam Hussein.

Consumer expectations regarding economic conditions six months out have improved significantly over 2003. From the March trough of 69.6, the expectations component now stands at 89.8. At the same time, respondents haven't been as optimistic about the here and now. Since dipping to 77.6 in March, 2003, the present conditions index currently stands at 92.6.


Steve Ballmer, Power Forward
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