07 Nov 2003 Economy Turning Positive, Investors Still Wary
Great news on the economy and from companies this week supports the market highs, but fails to propel them higher. The big picture is getting considerably brighter. It is increasingly evident that the economy is gaining momentum propelled by a broadening array of industries.
The economy’s expansion no longer rests solely on the shoulders of the consumer. Business investment is increasing as well. Investment in Technology rose 7.5% last quarter over the year-ago quarter. In October the Institute for Supply Management’s factory index rose to the highest level in almost four years as factories increased production to meet rising demand. The index rose to 57 from 53.7 in September, the highest since January 2000. It’s the fourth straight month the index has exceeded 50, indicating expansion in manufacturing.
The new orders index which accounts for one third of the total, jumped to 64.3 from 60.4 in September. That’s the highest since June 1994, according to Bloomberg. A separate release from the U.S. Census Bureau showed that Factory Orders increased by a half a percent in September, for the fourth time in the past five months.
On Wednesday the ISM released its index for the service industry showing expansion at a faster rate than last month. In fact, the index at 64.7 is the second highest level on record. Index readings higher than 50 signal expansion.
A gauge of employment in the service index rose to the highest level since November 2000. Treasury Secretary John Snow last month noted that private forecasts indicated that job gains might eventually reach 200,000 per month. The government just announced that October non-manufacturing payrolls increased by 126,000.
Moments ago, the U.S. Labor Department released its Unemployment rate for October at 6.0%, down slightly from last month’s rate of 6.1%. Total employment in October increased by 441,000 to 138 million people.
Job growth to some extent has been stymied by the huge gains in productivity. The Labor Department released a preliminary report showing that productivity had increased by 8.1%! But Greenspan points out that there is a “dwindling supply of efficiencies” left for companies to take. They have essentially squeezed all they can from their existing workforce, plant, equipment and technology. Current numbers suggest that companies are beginning to rely more on new hires than on tweaking new economies from their existing operations.
Builders put $910.6 billion of construction in place at an annual rate of 1.3% higher than August, the previous record. Non-residential construction, slightly less than half the construction total, increased by 2.5%. Construction spending, which represents 5% of the economy, continues to benefit from 45-year low interest rates.
The economy’s growth will not likely continue at its third quarter rate of 7.2%, but according to ISM survey director Norbert Ore, an ISM reading of 57 suggests GDP growth of 5.2%. That’s considerably higher than the 3.6% rate of economic expansion in the period between 1991 and 2001.
Auto makers GM and Ford are responsible for the limited disappointing news this week as they reported declines in their sales. In October, GM’s sales fell 7.2% on lower incentives and Ford’s declined 1.9% on lower car sales. DaimlerChrysler bucked the trend as its sales increased by 11%. Chrysler reported that its car sales fell by 11% while truck sales rose by 17%.
Some of the major companies reporting earnings this week included Kellogg’s ($.56 vs. $.51 estimate), MetLife ($.81 vs. $73 est.), Emerson Electric ($.66 vs. $.62 est.), Gillette ($.41 vs. $.36 est.), and Cisco Systems ($.17 vs. $.15).
Stocks like the ones above have performed well this week as they surprised investors with better than expected earnings, but the broad averages have been sluggish. CNBC analysts attributed part of the market pressure to large mutual fund outflows from companies like Putnam that have been indicted by New York Attorney General Elliott Spitzer for securities violations. Investors have withdrawn $4.4 billion from Putnam this week. Those withdrawals require the manager to sell large amounts of stock to cover their withdrawals.
For the most part though, investors are still largely in a wait-and-see mode. The markets have accurately predicted the late-year economic strength, but await further signs before stepping out further. Performance from the fourth quarter of this year and the first quarter of next year will require more fundamental improvement across the board as compared to the economy’s reaction thus far to immense economic stimuli. If the economy continues to grow during the critical coming months, we will likely see much more investor enthusiasm for stocks. We believe both will happen.