Good riddance to the third calendar quarter which ended yesterday with the S&P 500 down .70% and the NASDAQ down 7.24%.  The worst of the declines came in July and were caused in part by rising crude oil prices as well as disruptions caused by four major hurricanes in the South and East.  Investors spent all of July and half of August ratcheting down their expectations for growth; as car sales, home sales, consumer confidence, and consumer spending all weakened. 

This week’s batch of economic news continued mixed as it has been for the last few weeks.  A clearly good signal came today though, in the government’s report of Durable Goods Orders.  It showed that the nation’s manufacturing economy is gaining strength.  With the volatile transportation segment removed, durable goods increased a whopping 2.3%, almost tripling economists’ estimates for the month.  Manufacturing accounts for a third of the U.S. economy and remains the “engine of the global economy,” according to Bloomberg News.  Our manufacturing segment alone exceeds the individual gross domestic product of all but four nations: the U.K., Germany, Japan, and the U.S.  American factories shipped more than half of the world’s global exports in 2003.  

The slow-down of the second quarter appears to be behind us.  Retail sales, excluding autos, rose for the fourth month in August.  Consumers remain cautious largely due to oil prices, but they continue to spend nevertheless.  Same-store retail sales were up 1% in September.  Consumer spending, which represents two thirds of the economy, rose at a 1.6% rate during the second quarter.  The consumer should remain healthy as the acceleration of job growth numbers will continue to improve income and confidence. 

Treated almost with a superstitious caution, the “I” word is avoided in conversation and print almost to the extent that it is feared by financial investors.  To say it is to give it credibility and the spread of that belief might even cause it.  If a single company is successful in passing on price increases to customers so that others follow, then industries, then sectors, then, ba da bing INFLATION!

U.S.employers added 144,000 workers to their payrolls in August.  The increase represented the largest since May and the first increase since March.  The increase follows a revised 73,000 jobs created in July which was more than twice the number originally estimated.  Manufacturing is also showing renewed strength as that sector added 22,000 jobs, 16,000 more than July’s revised rate of increase. 

The U.S. Economy grew at a 2.8% annual rate in the second Quarter as higher oil prices dampened consumer demand and as imports of record amounts of foreign goods created a record trade deficit.  Corporate profits after taxes, reported for the first time today, rose 17.9% in the 12 months ended in June.  Business investment in equipment and software was revised up to the strongest pace since the third quarter last year.  Consumer spending was revised upward in this report from last month’s preliminary number of 1% to 1.6%.  

Oil futures are now above $49.00 per barrel nearing the record highs (inflation-adjusted) reached during the oil embargo of the 1970’s. Iraq’s shipments have dropped about 1 million barrels a day from 1.8 million in April.  Oil prices have set records every day save one since July 30.  World oil traders are concerned that the reduced supply fromIraq,Russia, andVenezuelacannot be offset by other OPEC countries which are producing at full capacity. Saudi Arabiais the only country with capacity to offer and their oil minister said yesterday that they were prepared to pump as much as they could. 

Rising oil prices continue to drain optimism from the equity markets and from corporate managers.  Over 80% ofU.S.companies have reported their earnings now and on average they are up 40% over last year, according to the Wall Street Journal.  Advanced Industrial Equipment (1,974%), Coal (1,532%), Internet Services (946%), and Communications Technology (588%) are the leaders so far.  But while the latest earnings reports are generally good, managers such as Cisco’s John Chambers appear less certain about the future.  They say that their customers seem less enthused than they were earlier in the year.  The so-called energy tax appears to be having some degree of economic impact. 

The U.S. economy slowed to a 3% rate in the second quarter according to the government report just released.  The slower than expected growth was the result of rising energy prices and the weakest pace of consumer spending in three years.  Consumer spending which represents 70% of the economy increased only 1% after rising 4.1% during the first three months of the year.  The slowdown in GDP follows an upwardly revised 4.5% growth rate for the first quarter.  The bond market responded favorably to the news as the inflation pressures fall with slower growth.  

We are in the midst of earnings season once again.  This time, however, analysts’ projections may be catching up to the actual pace of company earnings being reported.  In more cases than in previous quarters, analysts have been a little too optimistic about the actual pace of growth.  But we should not lose sight of the fact that the actual rate of earnings growth is still quite good.