Vital Signs for the Week of Mar. 15


Manufacturers may finally be at the end of the tunnel. In the fourth-quarter, industrial production swelled by an annualized clip of 5.4%, the biggest gain since the second quarter of 2000. And most signs point to a strong first-quarter as well. Indeed, the consensus among economists queried by Informa Global Markets is that industrial production climbed another 0.4% in February. If the forecast pans out, output could post another annualized increase of better than 5% for the first three months of 2004.

The combination of investment and inventories are pulling the factory sector out of its long, dark slump. According to the Federal Reserve, production of business equipment rose 0.5% in January, and was up 3.3% from a year ago. While the yearly rise is modest, it's the best showing since the start of 2001. And the rebound in investment isn't just in the high-tech sector: Production of machinery is up 5.8% from last January, and overall durable goods production is up 4.4% over the same period.

How long can the party last? Manufacturers seem to believe at least another couple of quarters. Respondents to the February Fed surveys from the Richmond, Philadelphia, and New York regional Fed banks all expressed optimism about conditions over the next six months, although readings from all three regions weren't quite as ebullient. However, both regional surveys and the Institute for Supply Management's national manufacturing activity index show the backlog of unfilled orders is still rising. This is a positive indication that output should accelerate, at least in the short term.

Perhaps the most encouraging sign is on the jobs front. To be sure, the Labor Dept.'s February employment report showed factory payrolls fell again. However, it was the smallest fall since manufacturers began their uninterrupted slashing of payrolls in early 2000. In addition, the lengthening of the factory workweek and increase in manufacturing overtime hours bolster the positive employment sentiment in the factory activity surveys. In fact, the Labor Dept. showed over half of manufacturers did add workers in February, a drastic shift from a year ago when only 15.5% increased payrolls.

When and if the Labor Dept.'s employment figures finally do show net monthly job gains among manufacturers, investors and economists will likely update their interest rate forecasts. Because until American businesses, including manufacturers, start creating jobs at a healthy clip, few expect the Federal Reserve will begin raising interest rates.

Here's the week's economic calendar:

EMPIRE STATE MANUFACTURING SURVEY

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

The New York Federal Reserve Bank will release its March survey of business conditions for manufacturers in the New York Fed district. According to Informa Global Markets, the headline manufacturing activity index probably stayed strong. The consensus forecast of economists surveyed is 38, after hitting 42.1 in February, from 38.9 in January. The new orders index was virtually unchanged at 34.9, from 34.8 in January. Shipments grew at a slower pace, with the index slipping to 26.6, from 41.4 in the previous month.

While factory payrolls continue to contract nationwide, the New York Fed survey shows factories are hiring within the region. The index tracking number of employees was positive for a fifth straight month, coming in at 16.5, after hitting 24.5 in January. Despite the fall in the index, a little more than 11% of respondents stated that payrolls were smaller. Over a quarter of the factories that responded said they added workers. Another positive sign was an additional increase in the index for average workweek. Extending the workweek can only go so far for manufacturers. If the component continues at this pace, additional hiring seems inevitable.

Looking forward, the February indexes tracking expectations for the next six months were positive, although not as strong as January. The outlook for general business conditions eased to 53.93, from 62.5 in January. However, the index tracking expectations of capital spending plans did rebound from the January level of 26.9, to 32.8 in February.

INDUSTRIAL PRODUCTION

Monday, Mar. 15, 9:15 a.m. EST

Industrial output in February is forecast to have expanded by 0.4%, say economists surveyed by Informa Global Markets. January factory output rose 0.8%, largely on an increase in the output of utilities as many regions in the U.S. were buffeted by harsh winter weather during the month. In December, industrial output was unchanged, after a broad-based 1% gain in November. Based on the February forecast, first-quarter industrial production is headed for another solid gain approaching 5.4%.

The average operating rate for all industries probably climbed to 76.4%, from 76.2% in January and 75.4% in February, 2003. As factories begin to hum again, excess capacity will get soaked up at a pretty rapid clip. That's because manufacturers have kept a lid on adding new capacity. In January, factory capacity had grown by only 1% over the past 12 months, the smallest yearly increase since early 1984.

HOME BUILDERS SURVEY

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

The National Association of Home Builders will release its March survey results. The monthly report updates housing market conditions by measuring builders' assessments of current sales, buyer traffic through model homes, and expected demand. The median forecast of economists surveyed by Informa Global Markets is 66, after slipping to 65 in February, from 69 in January, and 70 in both December and November. Among the components, the index tracking the level of prospective buyers fell the most, down to 46, from 51 in January. The index of single-family home sales retreated to 72, from 76 in January, while homebuilders' expectations for sales over the next six months also eased. Bad winter weather was blamed for much of the fall in the overall index.

The survey has shown some softening in the housing sector over the past few months. The indexes appear to point towards a gradual easing in housing. "Still, the outlook for sales conditions remains quite good heading into the spring home buying season," according to NAHB Economist Michael Carliner.

MEETINGS OF NOTE

Tuesday, Mar. 16

The state of Illinois holds its Democratic Party Presidential primary.

9:00 a.m. EST

The Federal Reserve's Federal Open Market Committee meets to discuss monetary policy. An announcement by the Fed will come on Wednesday around 2:15 p.m.

Economists expect the FOMC to keep the federal funds rate at 1%. In the Jan. 28 statement following the two-day meeting, the Fed said, "Although hiring remains subdued, other indicators suggest an improvement in the labor market." It appears that's still the case. In a Mar. 11 speech, Chairman Greenspan stated, "In all likelihood, employment will begin to increase more quickly before long as output continues to expand." Many economists believe the labor market is the key gauge of when the Fed may make its next move, universally assumed to be a rate hike. No action is expected until gains in nonfarm payrolls come in at a consistent pace far above the six-month average of 61,000 through February.

Indeed, investors and economists will more likely focus on whether the Fed alters its view on inflation. In the last statement, the central bank stated the likelihood of a further slowdown in inflation has dissipated. Since then, inflation risks appear to have gradually moved to the upside.

ICSC-UBS STORE SALES

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

This weekly tracking of retail sales, assembled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ending Mar. 13. In the week ended Mar. 6, seasonally adjusted sales were off 0.3%, after holding steady during the prior week, and slipping 0.2% over the week ended Feb. 28.

NEW RESIDENTIAL CONSTRUCTION

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

Housing starts probably moved up to an annual rate of 1.92 million in February, according to economists queried by Informa Global Markets. In January, housing starts eased to an annual rate of 1.9 million, from a pace of 2.07 million -- the best monthly showing since February, 1984 -- and 2.05 in November. In 2003, housing starts totaled 1.85 million. That topped the 1.7 million level in 2002, and was the best performance since 1978.

INSTINET REDBOOK RESEARCH STORE SALES

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

This weekly measure of retail activity will report on sales for the second fiscal week of March, ended Mar. 13. During the first week, ended Mar. 6, store sales were down 0.7% compared to the same period in February. For the entire fiscal month of February, sales were up by 1.2% compared with January.

MORTGAGE APPLICATIONS

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

The Mortgage Bankers Assn. releases its tally of mortgage applications for both home buying and refinancing for the week ended Mar. 12. During the period ended Mar. 5, the purchase index moved up to 428.6, following a small decline to 422.6 over the week ended Feb. 27, from 423.5 for the week ended Feb. 20. The latest reading of the four-week moving average through Mar. 5 rebounded to 422.2, from 415.6 during the prior week. The average rate on a conventional 30-year mortgage, according to HSH Assoc., inched down to 5.70% in the week ended Mar. 5, from 5.72% over the previous period.

The refi index increased for a fourth straight week. During the week ended Mar. 5, the refi index hit 3567.6, from 3532.2 in the week ended Feb. 27, and 3361.9 during the week ended Feb. 20. The refi index four-week moving average, however, rose to 3440, from 3322.9 for the week ended Feb. 27.

Mortgage activity data point to a stronger February for the housing market. In January, the downturn in housing data was mostly related to winter weather. With mortgage applications holding up and interest rates still very low, the housing sector should have a good spring.

CONSUMER PRICE INDEX

Wednesday, Mar. 17, 8:30 a.m. EST

Consumer prices for all goods and services are forecast to have jumped by 0.3% during February, according to economists surveyed by Informa Global Markets. Consumer prices climbed 0.5% in January, after a 0.2% gain in December, and a 0.2% slip during November. Yearly inflation would move back to 1.7%, based on the February forecast, after rising to 2% in January.

Less food and energy, prices most likely posted a smaller 0.2% increase, following a 0.2% rise in January. The January rise was largely due to higher energy prices. Monthly fuel and utility prices surged 1.6% in January. High gasoline and other petroleum product prices are likely to show strong monthly increases in February. According to Bloomberg Financial Markets, the average U.S. cost of a gallon of gasoline at the start of March hit $1.72, from $1.62 at the beginning of February. Based on the forecast 0.2% increase, yearly core inflation should rise to 1.2% in February, from 1.1% in January.

REAL EARNINGS

Wednesday, Mar. 17, 8:30 a.m. EST

Inflation-adjusted weekly earnings of production workers in February most likely fell 0.2%, based on the month's 0.2% jump in average weekly earnings and the forecast 0.4% increase in the consumer price index for February. Real earnings in January improved 0.2%, following a December drop of 0.6%. Compared with the same period a year ago, real earnings in January were down 0.1%.

JOBLESS CLAIMS

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

First-time claims for jobless benefits for the week ended Mar. 13 probably stayed pretty stable at 345,000, according to economists queried by Informa Global Markets. Jobless claims fell to the lowest level since mid January, to 341,000 in the week ended Mar. 6, after easing to 347,000 in the prior period, from 351,000 for the week ended Feb. 21. The four-week moving average fell back to 345,800, from a downwardly revised 352,500 in the previous week. The recent retreat in jobless claims supports earlier assumptions that the February gains were mostly weather related. Indeed, over the past few weeks, states have reported to the Labor Dept. significant declines in the number of construction-industry layoffs.

During the week ended Feb. 28, continuing jobless fell to 3.03 million, the lowest level since July, 2001. In the week ended Feb. 21, continuing claims fell to 3.07 million, from 3.09 million.

LEADING INDICATORS

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

The Conference Board's composite report of leading economic indicators for February very likely improved by 0.1%, according to the consensus forecast of economists surveyed Informa Global Markets. In January, the index improved by 0.5%, after increases of 0.2% in December and 0.3% in November. Based on the February forecast, the index would be up 4.1% from a year ago, the strongest yearly gain since 1984.

A rebound in the average manufacturing workweek, an increase in stock prices, and a rise in money supply during February probably lifted the index higher. However, the fall in the University of Michigan's index of consumer expectations and soft headline data for factory orders of capital goods will hold the February rise to a minimum.

PHILADELPHIA FED SURVEY

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

The Philadelphia Federal Reserve Bank will release its March survey of business conditions for the mid-Atlantic region. Economists queried by Informa Global Markets say the index of general business conditions will probably come in at 28, after falling to 31.4 in February, from 38.8 in January. The new orders index retreated in February, to 27.8, from 36.5 for the previous month. While the indexes have fallen, they are still at healthy levels, historically speaking.

Once again, the employment related indexes were upbeat. The February measure of the average workweek rose to 23.6, from 12.9 in January. And the index tracking hiring trends remained positive for a fifth straight month, coming in at 12.5, from 17.5 in January. Only 8.4% of respondents said they had cut jobs, while 20.9% reported an increase in payrolls. By James Mehring


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