10 Aug 2001 Appearing in this Brief
As I write this letter, the market is falling rather dramatically. It was triggered by the PPI release this morning which was down considerably below expectations, primarily on falling energy prices. Since then, the newswires show that 50 U.S. and British aircraft have attacked three Iraqi military targets. Given the recent terrorist and military hostilities in Israel, the market undoubtedly fears worse trouble in the Middle East.
I wouldn’t be surprised the see Greenspan offer another rate reduction of .25% or even .50% before the next meeting on the 21st.
Observations
The work-down of inventories is the single biggest factor driving down profits.
The employment index stopped falling in May, and July was better than June.
Consumer sentiment improved coincident with employment
Tax rebate checks are showing sings of helping stimulate retail spending
The direction of NAPM new orders in September and October will indicate recovery or lack of it.
Lower energy prices should help real purchasing power later in the year. As the chart below demonstrates, real average weekly earnings are holding up well, in stark contrast to prior downturns when earnings growth headed south.
With the labor market still within proximity of full employment, compensation growth for workers is holding up very well, which is, in turn, underpinning consumer spending. Year over year growth in average weekly earnings and hourly earnings, the first wage indicators for the month, are at 17-and 37-month highs respectively.
The worst of the labor market bleeding could be behind us in manufacturing or it could be distortions created from seasonal adjustments.
Second quarter productivity rose at a 2.5% annual rate. U.S. companies were more efficient from April through June as they fired workers and cut hours to cope with the slowest pace of economic growth in more than eight years. That followed a revised 0.1 percent rate of increase in the first quarter, when companies were slow to trim payrolls as demand cooled.
Companies are maintaining their productivity gains by using fewer workers and that will be good for profits.
Productivity lowers the cost of doing business and enables the economy to grow faster than once though possible without triggering inflation.
The productivity gains since 1996 help explain why economists including Alan Greenspan believe that investments in the Internet, computers and other digital technology will continue to help boost productivity for years to come. “By all of the evaluations that we make, we are only partway through a technological expansion,” which has elevated “the trend growth in productivity,” Greenspan told the Senate Banking Committee last month. “I see nothing in this recent period (to change the view) that when we are through this period” that “we will go back to a rate of increase that is significantly above the (productivity rate) we had prior to 1995.”
Beige Book release on Wednesday by the Fed brought bad news for the market as they said that Economic growth was stagnant at best in most areas of the U.S. during June and July, as weakness in manufacturing began to affect other parts of the economy. The report offered support for investor expectations that Fed policy makers will lower interest rates at their Aug. 21 meeting.
The Producer Price Index, announced today, fell a greater than expected .9% causing further concern for investors who would like to see prices stabilizing. The expected decline was for .3% and it follows a .4% decline in June. The core PPI (excludes food and energy) rose .2% after rising .1% in June.
Businesses are facing a tough competitive environment with little or no pricing power to boost profits.
While the Fed’s interest rate reductions have had little impact so far, expect a .25% or even a .5% cut at or before the next meeting this month on the 21st.
