Vital Signs for the Week of Nov. 1


The employment numbers for October should look pretty good. Hurricanes Jeanne, Ivan, and Frances caused havoc during August and September. The powerful storms caused many people to miss work during September. According to the Labor Dept., those who missed work in September for weather related reasons stood at 225,000. Strip out the agricultural sector and the total was still 205,000.

It would seem that October should show some extra kick as the return of the weather-related unemployed is added to the normal October job growth. In addition, it would seem logical that some extra job growth took place in October, as the hurricanes most likely put off some planned hiring.

Economists surveyed by Action Economics expect October payrolls to grow by 185,000 positions. Even the factory sector is expected to post a net gain in jobs after a fall of 18,000 in September.

However, it wouldn't be surprising to see softer job numbers heading into next year. That's because higher oil prices and the increasing costs of adding workers may cause companies to continue their cautious hiring practices.

The latest surge in oil prices over the past eight weeks caught many by surprise. What's more, despite oil's drop from more than $55 per barrel on Oct. 26 to less than $52 on Oct. 29, there are few signs that prices will strike a substantial or lasting retreat in the immediate future.

Those tracking the energy market believe the recent price range of $50-$55 per barrel contains a large risk or uncertainty premium. Increased certainty about supply or some easing in demand would likely cause that premium to quickly evaporate. Such a scenario, however, is hard to see right now without some sudden unexpected shift in supply or demand conditions.

The Labor Dept.'s employment cost index figures for the third quarter also shows that employee compensation costs are on the rise. Compared with a year ago, benefits, such as health care, rose by 6.8% from a year ago, compared with a yearly gain of 6.5% in the second quarter. Despite strong profit margins and coffers flush with cash, Corporate America still appears to be in a cost containment mode.

That isn't to say companies are being stingy. Indeed, the latest data is likely to show that capital investment is still going strong. The Oct. 27 report on September durable goods orders -- excluding the volatile transportation sector -- was solid. The Commerce Dept.'s measure of nondefense capital goods orders, which covers computers to farm machinery, rose 0.6% in September and stood 8.2% higher than a year ago. Take out aircraft and orders were up 2.5% for the month and 7.2% from a year ago. The October ISM factory activity index is expected to show continued growth in both the manufacturing and non-manufacturing sectors.

The issue may be that companies are still in hot pursuit of productivity growth. Low interest rates and a temporary tax provision that lets companies take an immediate 50% bonus depreciation allowance on new capital equipment purchases most likely makes capital investment look more attractive to many companies than adding workers.

To be sure, as demand picks up, companies will continue to need more employees. However, large scale hiring generally lowers productivity growth as new workers get up to speed. In addition, the rising cost of adding a worker also puts pressure on unit labor costs.

After a couple of years of stellar profits and rising margins, companies will find it tougher to duplicate their recent performances. In an effort to maintain their profit margins and meet investor expectations, businesses may decide to limit their hiring.

Here's the weekly economic calendar.

MEETING OF NOTE

Monday, Nov. 1, 9:20 a.m. EST

Federal Reserve Bank of Philadelphia President Anthony Santomero makes brief remarks at a bell ringing ceremony at the Philadelphia Stock Exchange in Philadelphia.

EARNINGS REPORTS

Humana, Maxim Integrated Products, SYSCO, XL Capital, and more.

PERSONAL INCOME AND CONSUMER SPENDING

Monday, Nov. 1, 8:30 a.m. EST

Personal income probably continued along its path of steady growth. The Action Economics survey of economists shows a consensus forecast of a 0.3% growth during September. In August, personal income rose by 0.4%, after 0.2% gains in both July and June. Compared with a year ago, income was up by 5%. Taking inflation into account, personal income was still up 2.8% from a year ago in August.

Outlays on goods and services is forecast to have rebounded by 0.6% in September. During August, outlays were flat after a 1.1% jump in July. Similar gains in consumer spending may be hard to achieve given higher energy prices and lingering uncertainty about the strength of the labor market.

Another important part of this report is the price index of personal consumption expenditures (PCE). In August, the price index was up 2.1% from a year ago, after easing to a yearly rate of 2.4% in July, from 2.5% in June. Excluding food and energy, the increase in this inflation measure was 1.4%.

Given the uncertainty about whether the Federal Reserve will raise interest rates in both November and December, the PCE price index will become a particularly important piece of data to watch. This is the preferred gauge of inflation by Fed Chairman Alan Greenspan. If inflation remains subdued in the face of high energy prices, the Fed may be inclined to raise rates in November and then hold off until the economic picture becomes a little clearer.

ISM SURVEY

Monday, Nov. 1, 10 a.m. EST

The Institute for Supply Management's October index of industrial activity is expected to post a small gain. The consensus forecast among economists surveyed by Action Economics is for a reading of 59%. The September reading was 58.5%, a slight decline from the August level of 59%. In July the index stood at 62%.

Respondents said that new orders grew at a slightly slower pace during September. The order index slipped to 58.1%, from 61.2% in August, and 64.7% in July. The production component for September showed a slight acceleration in output, with the index rising to 61.6%, from 59.5% in August. Of course, the September readings may have been affected by the major hurricanes that hit much of the eastern U.S. during the month.

Nonetheless, demand remains robust enough for manufacturers to keep hiring. In September, the employment index climbed to 58.1%, from 55.7% in August, and 57.3% in July.

The overall picture appears to be one of moderating growth.

CONSTRUCTION SPENDING

Monday, Nov. 1, 10 a.m. EST

Construction spending held up well in September, according to economists surveyed by Action Economics. The consensus forecast is for a 0.4% increase in outlays during September, after a 0.8% gain in August, a 1.1% surge in July, and a 0.4% rise in June.

Spending on private single-family homes accounts for over a third of total construction outlays and continues to be a driving force within the construction sector. In August, outlays for single family home construction rose 2.1%.

Meanwhile, spending on office buildings shrank by 1%. Government outlays fell by 1% as well during the month.

The current trend in home construction spending is expected to shift. The Fed is expected to keep raising rates next year in order to get the current rate of 1.75% back to a level that is less accommodative. Expectations are for the Fed to raise rates to a level between 3% and 4%.

MEETING OF NOTE

Tuesday, Nov. 2

U.S. presidential and congressional elections take place.

EARNINGS REPORTS

AmeriSourceBergen, Clorox, Emerson Electric, International Game Technology, Lincoln National, MBIA, Prudential Financial, Tenet Healthcare, and more.

ICSC-UBS STORE SALES

Tuesday, Nov. 2, 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 Oct. 30. In the week ended Oct. 23, seasonally adjusted sales were down 0.6%, after a slip of 0.2% in the prior period, and a 0.5% gain in the week ended Oct. 9.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, Nov. 2, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the fourth and final fiscal week of October, ending Oct. 30. During the first three weeks week ended Oct. 23, sales were down 0.7% from the same period in September. For the full month of September, sales were grew 0.7%, after dropping by 1.1% in August.

EARNINGS REPORTS

Wednesday, Nov. 3

BJ Services, CIGNA, Duke Energy, Electronic Data Systems, Express Scripts, InterActiveCorp, QUALCOMM, Rockwell Collins, Interpublic Group, Time Warner, UnumProvident, and more.

VEHICLE SALES

Wednesday, Nov. 3

Sales of domestic and imported cars and light trucks during October probably fell back to an annual pace of 16 million vehicles, according to J.P. Morgan Chase. Such a pace would be the weakest since June. In September, sales accelerated to a pace of 17.5 million vehicles, from a 16.6 million rate in August, and 17.2 million in July.

Auto sales are facing very tough challenges as the new model year gets underway in earnest. Over the past two years, third-quarter sales have outpaced the final period of the year.

This time around, resurgent gasoline prices and higher energy costs appear to be hampering consumer spending. The Big Three will try to hold back on incentives and rebates as they push the new 2005 models. Even so, auto makers have found it more difficult to prop up sales with incentives.

MORTGAGE APPLICATIONS

Wednesday, Nov. 3, 7 a.m. EST

The Mortgage Bankers Association releases its tally of mortgage applications for both home buying and refinancing for the week ending Oct. 29. In the week ended Oct. 22, the purchase index fell back to 440.9, from 461.4 in the week ended Oct. 15, from 436.3 in the previous period. The latest reading of the four-week moving average retreated to 449.4, from 456.5 in the period ended Oct. 15.

The average rate on a conventional 30-year mortgage, according to HSH Associates, edged down to 5.81% in the week of Oct. 22, from 5.82% in the prior week.

The refi index rose to 2233.8, after climbing to 2155.2 in the week ended Oct. 15, from 1949.2 in the previous period. As a result of the latest increase, the refi index four-week moving average continued to grow, reaching 2152.3, from 2146.6 during the prior period.

MANUFACTURERS' SHIPMENTS, INVENTORIES, AND ORDERS

Wednesday, Nov. 3, 10 a.m. EST

Factory orders probably rebounded in September, but not to the stellar levels posted in July and June. The median forecast from Action Economics is for a 0.4% increase in September.

August factory orders declined 0.1%, after a 1.7% jump in July and a 1.2% gain in June. The recent numbers have been skewed by the transportation sector. Airplane orders can have a big impact on a monthly result. In August, nondefense aircraft orders plummeted by 42.9% after soaring by 103.5% in July. After stripping out the transportation sector, orders were up 1.3% in August and 0.8% in July.

Published data on new orders for durable goods showed a gain of 0.2% for September. However, the overall tally of durable goods orders was again dragged down by the transportation sector, where airplane orders fell another 16%. When scanning Wednesday's factory data, it may once again be more informative to look at how orders less the transportation sector performed. Excluding the transportation sector, durable goods orders were up 1.7%.

After some weakness in the spring, particularly the 1.1% drop in April orders, businesses have picked up the pace on capital investment spending once again.

ISM NON-MANUFACTURING SURVEY

Wednesday, Nov. 3, 10 a.m. EST

The Institute for Supply Management releases its October index of business activity in the mostly services, non-manufacturing sector. The median forecast of economists queried by Action Economics is a reading of 58.3%. In September, the index stumbled, coming in at 56.7%, after a 58.2% level in August, and 64.8% in July.

The September easing was accompanied by small declines in the new orders and backlog orders indexes. The new orders index inched down to 58.5%, from 58.6% in August, and a 66.4% reading for July. The unfilled orders index slipped to 52.5%, from 53% in August, and 55% in July.

The non-manufacturing sector also reported an increase in hiring. The employment index grew to 54.6%, from 52.5% in August, and 50% in July -- the official inflection point between rising and falling payrolls.

MEETING OF NOTE

Thursday, Nov. 4, 9:15 a.m. EST

Federal Reserve Bank of Dallas President Robert D. McTeer gives an opening speech at a Dallas Fed conference on globalization.

EARNINGS REPORTS

Becton, Dickinson and Company, Calpine, DTE Energy, Hartford Financial Services, KeySpan Energy, Nicor, Qwest Communications, Rockwell Automation, RR Donnelley, Sempra Energy, Univision Communications, and more.

CHAIN STORE SALES

Thursday, Nov. 4

The International Council of Shopping Centers will release its October same-store sales figures for major U.S. chain retailers. According to the latest weekly sales report by the ICSC, overall October sales most likely rose by 3%-4% from a year ago. In September, sales were up 2.4% from a year ago. The string of hurricanes that battered the eastern U.S. was a large negative factor.

While the October results should be better than September, the ICSC claimed in the weekly sales report that stubborn gasoline prices had the potential to hold back monthly sales in October by a half a percentage point.

JOBLESS CLAIMS

Thursday, Nov. 4, 8:30 a.m. EST

First-time claims for jobless benefits for the week ended Oct. 30 is expected to slide to 340,000, according to the consensus forecast of economists surveyed by Action Economics. Jobless claims climbed to 350,000 in the week ended Oct. 23. For the week ended Oct. 16, claims fell to 330,000, from 355,000 in the prior week.

The four-week moving average dropped to 343,300, from 348,800 in the period ended Oct. 16. In the week of Oct. 16, continuing jobless claims inched up just above the 2.8 million level.

PRODUCTIVITY AND COSTS

Thursday, Nov. 4, 8:30 a.m. EST

Productivity growth in the third quarter, measured as output per hour worked, is expected to have increased to an annual rate of 1.1%, after a second quarter gain of 2.5%, and a 3.7% increase in the first quarter. 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.

Second-quarter unit labor costs most likely grew by 2%, following a 1.8% gain in the second quarter, a 1.6% fall in the first quarter, and a 1.2% rise in the final period of 2003. In both 2003 and 2004, unit labor costs fell.

As the labor market improves and adds workers, productivity growth is likely to slow some. Despite having experience, newer workers are unlikely to be as productive as those already employed.

Another typical effect of growing labor markets is higher unit labor costs. While there is still a bit of slack in the general labor market, some sectors are hard pressed to find qualified workers. These scenarios could help push up wages. In addition, benefit costs that are rising faster than inflation could also help push up overall labor costs.

MEETING OF NOTE

Friday, Nov. 5, 11:45 a.m. EST

Federal Reserve Board Governor Susan Schmidt Bies speaks about financial market and institutional issues that are impacting the securities industry at the Securities Industry Association's annual meeting in Boca Raton (Fla.).

1 p.m. EST

Federal Reserve Bank of Chicago President Michael Moskow speaks about community development in Chicago.

EARNINGS REPORTS

Berkshire Hathaway, and more.

EMPLOYMENT REPORT

Friday, Nov. 5, 8:30 a.m. EST

Economists are once again predicting better job growth. The median estimate of economists from Action Economics is a gain of 180,000 jobs for October. The September report posted a gain of 96,000, after another moderate rise of 128,000 in August, and 85,000 in July. The unemployment rate is expected to remain at 5.4%.

The forecast calls for an increase in factory payrolls by 10,000 jobs, after a surprising decline of 18,000 in September. Prior to the decline, factory payrolls grew by 4,000 in August and 5,000 in July. The latest regional and national factory activity indexes have been fairly positive regarding employment.

The average workweek very likely held at 33.8 hours for a fourth straight month, after dropping to 33.6 hours in June, from 33.8 hours in May. Meanwhile, gains in average hourly earnings are expected to rise by 0.3% for the second straight period, following consecutive increases of 0.3% in August and July.

CONSUMER INSTALLMENT CREDIT

Friday, Nov.5, 3 p.m. EST

Consumers probably racked up $6 billion of debt during September. That's the consensus estimate of economists surveyed by Action Economics. Total credit outstanding dropped by $2.4 billion during August, after an increase of $11.2 billion in July, the biggest monthly gain since January. In June, consumer debt rose by $4.4 billion after a $4.5 billion gain during May.

The pace of growth in consumer debt has slowed considerably. Through August, installment credit is on pace to increase by 3.6% in 2004. If the pace continues, it would the smallest yearly increase since the outright declines posted in both 1991 and 1992.

Once again, revolving credit, made up largely of credit cards, posted a decline of $3.3 billion. Through August, revolving credit has risen by $6.7 billion. In 2003, revolving debt increased by $14.9 billion. By James Mehring


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