Vital Signs for the Week of May 3


Higher interest rates are coming. That's what Federal Reserve Chairman Alan Greenspan said in congressional testimony on Apr. 21. But don't expect a move by the Fed at the May 4 monetary policy meeting. Economists surveyed by Action Economics don't see the central bank moving until August at the earliest. And it may still believe it can refrain from taking action for even a little while longer.

The Fed's note following the Tuesday policy meeting will most likely reflect a changing view of the economy. Another adjustment in the Fed's assessment of inflation is likely, and a more positive tone about the economy is possible. Economists and investors will be particularly interested to see whether or not the Greenspan & Co. change their stance that the risk of declining inflation is equal to the possibility of accelerating inflation.

The 4.2% increase in first-quarter real gross domestic product didn't meet rising expectations, but that isn't the underlying reason why the Fed may feel it can wait. The keys are the labor market and inflation. The April employment report will be an important gauge of whether revised expectations of Fed action by the summer may have been a bit presumptuous. Another increase in nonfarm payrolls of 300,000 would solidify current views. But if the jobs gains fail to meet the modest expectations of 178,000, the March report could be questioned.

PREPARING NOW. Even if jobs growth is on a more solid footing, as jobless claims and the ISM business activity surveys suggest, the labor market is still slack. Employers will maintain the upper hand in setting wages for a while. That will likely keep a lid on wage growth, which is an important ingredient for inflation. Labor is a bigger component of business costs than materials or equipment.

In addition, productivity remains strong so far. In 2003, its growth rose 4.3%, while the economy grew 3.1%. That helped the cost of labor required to produce goods to shrink by 1.2% last year. Increasing efficiency and falling unit-labor costs are expected again in the first quarter. As long as that trend holds, price pressures from higher employee costs, mainly in the form of benefit expenses, won't push up inflation.

Of course, better economic growth will eventually wring out excess labor and plant capacity, and the Fed must prepare for this. If it maintains the current rate for too long, it could lead to an overheated economy.

Even worse, the central bank would find itself behind the curve, forcing it to up interest rates faster and higher than it, or the financial markets, would like. Such a scenario could bring an abrupt halt to economic growth. That's why the Fed is getting the word out now about the growing chances of future hikes in the fed funds rate. Because even if jobs and inflation don't merit an August rate hike, the Fed knows its patience will eventually run out.

Here's the weekly economic calendar:

VEHICLE SALES

Monday, May 3

Sales of domestic and imported cars and light trucks in March are forecast to have held at an annual pace of 16.7 million vehicles, according JP Morgan Chase. In March, sales moved up to 16.7 million, from an annualized rate of 16.4 million vehicles in February, and 16.1 million in January. First-quarter sales came in at an annualized rate of 16.4 million, off from the discount-laden 16.9 million pace from last quarter, but stronger than the rate of 16 million vehicles in the first three months of 2003.

ISM SURVEY

Monday, May 3, 10 a.m. EDT

The April index of industrial activity from the Institute for Supply Management most likely inched up to 63%, according to the consensus forecast of economists queried by Action Economics. In March, the index moved back up to 62.5%, after a February easing to 61.4%, from 63.6% reading in January. The March forecast is in line with a pick up in factory activity. According to the ISM, readings in the low 60% range correspond to real gross domestic product near 7%.

The index components are also reflecting the robust pace of factory activity. The new orders index maintained a healthy level of 65.7%, from 66.4% in February. The percentage of respondents that reported further increases in orders rose to 50%, from 49% in February, and 48% in January. While not a component of the headline number, the index tracking unfilled orders rose to 63.5% in March, from 62% in February. That indicates the level of backlogged orders likely accelerated.

Manufacturers also reported a long list of commodities and raw materials rising in price. And the prices-paid index has soared to 86%, from 66% in December. The producer price index shows a limited ability so far for businesses to pass along higher input prices to customers on the wholesale or consumer level. A large chunk of the material increases are being dampened by productivity growth.

However, if manufacturers and other businesses continue to report longer wait times for getting supplies and inventories remain at such low levels, bottlenecks and shortages could sprout up. That would provide some room for additional, if narrow, ability to raise prices.

CONSTRUCTION SPENDING

Monday, May 3, 10 a.m. EDT

Outlays for new buildings probably increased 0.6% in March, according to the consensus of economists surveyed by Action Economics. In February, construction spending eased by 0.1%, after an 0.8% decline in January. Private residential construction, however, could rebound. Housing starts and completions turned up in March, after slipping in both January and February.

EARNINGS REPORTS

Legg Mason, Masco, News Corp., Reliant Resources, and more.

MEETING OF NOTE

Tuesday, May 4 9:00 a.m. EDT

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

Economists unanimously expect the FOMC to keep the federal funds rate at 1%. In the release immediately following the March meeting, the Fed said, "the probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation."

However, in congressional testimony on Apr. 20 and 21, Chairman Greenspan started to prepare the way for rate hikes by stating, "the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging." The language is not hawkish, but it appears to show a subtle change in stance progressing towards an eventual increase in the fed funds rate.

EARNINGS REPORTS

Clear Channel Communications, Equity Office Properties Trust, Northrop Grumman, Prudential Financial, Quest Communications International, Tyco International, and more.

ICSC-UBS STORE SALES

Tuesday, May 4, 7:45 a.m. EDT

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 May 1. In the week ended Apr. 24, seasonally adjusted sales slipped 0.5%, after a 1% jump in the week ended Apr. 17, and a gain of 0.8% in the prior week.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, May. 4, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the fourth and final fiscal week of April, ended May 1. During the first three weeks, ended Apr. 24, sales were off 2.3% from the same period in March. Part of the monthly dip may be due to the Easter holiday. For the full month of March, store sales ended up 0.4% compared with February.

MANUFACTURERS' SHIPMENTS, INVENTORIES, AND ORDERS

Tuesday, May 4, 10 a.m. EDT

Factory orders most likely rose 2.4% in March, say economists surveyed by Action Economics. In February, orders moved up 0.3%, after a 0.9% drop on January. The March forecast would put factory orders up 7.9% from the same period a year ago.

New orders in February for durable goods were already reported up 3.4% for March, after a 3.8% jump in February. Unfilled orders of factory goods probably increased in March as well. Backlogged orders for durable goods rose 0.8% for a second straight month in March.

MORTGAGE APPLICATIONS

Wednesday, May. 5, 7 a.m. EDT

The Mortgage Bankers Assn. releases its tally of mortgage applications for both home buying and refinancing for the week ending Apr. 30. In the week ended Apr. 23, the purchase index inched up to 463.5, from 434.1 in the prior period, and 432.2 in the week ended Apr. 9. The latest reading of the four-week moving average through Apr. 23 rebounded to 451.8, after slipping to 446.9 in the week ended Apr. 16.

The average rate on a conventional 30-year mortgage, according to HSH Assoc., broke the 6% level, hitting 6.05%. For the week ended Apr. 23, the mortgage rates stood at 5.99%.

The refi index lost more ground, falling to 2403 in the week ended Apr. 23, from 2550.3 in the week ended Apr. 16, and 2861.6 in the week ended Apr. 16. The refi index four-week moving average sank to 2985.4, from 3599.1 in the prior week.

ISM NON-MANUFACTURING SURVEY

Wednesday, May 5, 10 a.m. EDT

The Institute for Supply Management releases its April index of business activity in the mostly services, nonmanufacturing sector. According to the median forecast of economists surveyed by Action Economics, the April reading most likely eased to 65%, from the record high of 65.8% in March. The March reading broke the previous high of 65.7% reported this past January.

The key components also improved. More respondents said new orders picked up, with the index hitting 62.8%, from 60.3% in February. The employment index also improved, rising to 53.9%, from 52.7%.

Nonmanufacturers are also feeling greater price pressures. The index tracking prices paid by respondents surged to 65.7%, from 57.3% in February. The percentage of those surveyed who said prices paid for materials and services hit 43%, vs. just 3% who said prices had fallen. Indeed, the listing of commodities reported in short supply expanded in March.

EARNINGS REPORTS

Aquila, Entravision Communications, OGE Energy, Otter Tail, and more.

MEETINGS OF NOTE

Thursday, May. 6, 9 a.m. EDT

Federal Reserve Board Governor Susan Schmidt Bies gives the keynote address at the ALI-ABA financial services conference in Washington, D.C.

9:15 a.m. EDT

Federal Reserve Bank of Chicago President Michael Moskow gives opening remarks and introduces Federal Reserve Chairman Alan Greenspan at the Chicago Fed's 40th Annual Conference of Bank Structure & Competition in Chicago.

9:30 a.m. EDT

Fed Chairman Greenspan gives the keynote address at the Chicago Fed's 40th Annual Conference of Bank Structure & Competition.

10:50 a.m. EDT

Federal Reserve Bank of Richmond President Alfred Broaddus and Federal Reserve Board Governor Mark Olson take part in a panel discussion on bank competition at the Chicago Fed's Conference of Bank Structure & Competition.

4:55 p.m. EDT

Federal Reserve Bank of St. Louis President William Poole and Fannie Mae Chairman Franklin Raines take part in a panel discussion about government sponsored enterprises at the Chicago Fed's Conference of Bank Structure & Competition.

EARNINGS REPORTS

Alliant Techsystems, Calpine, Clorox, CMS Energy, Devon Energy, Simon Property, TXU, Univision Communications, William Cos., and more.

CHAIN STORE SALES

Thursday, May 6

The International Council of Shopping Centers will release its April same-store sales figures for major U.S. chain retailers. In March, receipts increased by a surprisingly strong 7%, building on the 6.7% jump from a year ago in February, the 5.8% gain in January, and a 4% rise in December.

There is a caveat in the March results. Last year's March sales were crimped by the start of the war in Iraq. However, the accelerating pace of growth over the past four months is positive and the Commerce Dept.'s data on retail sales -- up over 8% from a year ago in both March and February -- also paints a pretty picture for consumer spending.

JOBLESS CLAIMS

Thursday, May 6, 8:30 a.m. EDT

First-time claims for jobless benefits for the week ended May 1 most likely eased to 335,000, according to the median forecast of economists surveyed by Action Economics. Jobless claims slid to 338,000 over the week ended Apr. 24, the third time in the past two months that claims have come in below 340,000.

In the week ended Apr. 17, claims eased to a downwardly revised 356,000, from 362,000 in the week ended Apr. 10. The latest reading pushed the four-week moving average down to 346,500, from 347,800 for the week ended Apr. 17, and 344,800 in the prior period. During the week ended Apr. 17, continuing jobless claims came in at 3.01 million for a second straight period.

PRODUCTIVITY AND COSTS

Thursday, May 6, 8:30 a.m. EDT

Productivity growth in the first quarter, measured as output per hour worked, is expected to have increased to an annual rate of 3.4%, after a fourth-quarter increase of 2.6%, a third-quarter surge of 9.5%, and a second-quarter increase of 6.2%. That's based on the median forecast of economists surveyed by Action Economics. Productivity growth in 2003 was 4.4%, following a 5.0% increase in 2002, and a 2.1% improvement in 2001.

First-quarter unit labor costs most likely dropped 0.2%, following a 0.4% fall in the last quarter of 2003, and a 5.6% plunge in the prior period. Costs per worker for a unit of good produced fell by 1.2% from 2003, after a 2.5% fall in 2002, and a 1.7% increase in 2001.

MEETING OF NOTE

Friday, May 7, 9:30 a.m. EDT

U.S. Treasury Secretary John Snow addresses the Chicago Fed's Conference of Bank Structure & Competition.

12:30 p.m. EDT

U.S. Trade Representative Robert Zoellick to speak about free trade agreements at the Institute for International Economics in Washington, D.C.

EARNINGS REPORTS

Energy East, FirstEnergy, Pepco Holdings, Pinnacle West Capital, and more.

EMPLOYMENT REPORT

Friday, May 7, 8:30 a.m. EDT

Economists surveyed by Action Economics are forecasting a mild 178,000 increase in April payrolls. In March, the Labor Dept. reported 308,000 new jobs, after a disappointing gain of 46,000 in February, and a 159,000 increase in January. In addition, the unemployment rate is expected to have held at 5.7%.

Manufacturing payrolls are expected to have added 5,000 positions, after staying put in March, and a decline of 4,000 jobs in February. An increase in factory payrolls would be the first since July, 2000.

The average workweek is expected to inch up to 33.8 hours, from 33.7 in March. Longer workweeks are one indicator of an improving labor market, because it typically means increasing business activity. That's increasingly likely when payrolls are already beginning to rise. However, the current workweek is still at a moderate level. The factory workweek shortened a little, to 40.9 hours, from 41 hours in February.

However, given the manufacturing activity indexes, such as the Empire State Manufacturing Survey and the Chicago National Assoc. of Purchasing Management's industrial activity index, it appears that the employment data should improve again in April.

WHOLESALE SALES AND INVENTORIES

Friday, May 7, 10 a.m. EDT

Wholesale sales most likely grew 1.1% in March. That's the consensus of economists queried by Action Economics. In February, sales grew by 1.3%, following a 0.9% gain in January, and a 1.5% surge during December. Based on the March forecast, sales likely came in at a strong an annual pace of 8.5%, from 9.1% in February.

February wholesale inventories also jumped, up 1.2%, following a 0.2% increase in January. Since sales and inventories grew at virtually the same pace in February, the inventory to sales ratio held steady at 1.17.

Even though inventories are rising moderately, as long as demand continues to strengthen, businesses are likely to ratchet up their warehouse restocking in order to avoid supply shortages. That seems especially true given ISM's business activity reports showing supplier deliveries are slowing, increasing the chances of bottlenecks and delays at critical times.

CONSUMER INSTALLMENT CREDIT

Friday, May 7, 3 p.m. EDT

Consumers most likely accumulated another $7.3 billion in debt in February, according to the median forecast of economists surveyed by Action Economics. Total credit outstanding bumped up by $4.2 billion in February, following a $15.8 billion increase in January, and a $7.4 billion rise in December. Nonrevolving debt, which includes auto loans, continued to outpace revolving credit, made up mostly of credit card debt. In February, nonrevolving credit grew by $2.6 billion, while revolving debt was up by $1.6 billion.

A pickup in the pace of debt accumulation this year looks plausible given the economic scenario. Indeed, looking at a 12-month moving average of debt accumulation, the pace has already picked up since late last year. If the economy continues to strengthen, consumer demand will keep growing, increasing the likelihood of accelerating debt accumulation, especially if consumer demand leans towards larger durable goods such as appliances and autos.

Second, when the Federal Reserve starts to raise rates, cash from home refinancings will evaporate. That will remove a large and easy source of funds that consumers had relied on for making purchases. By James Mehring


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