Economy’s Vital Signs Strong

Before getting to the economics and financial happenings of the week I wanted to share a story with you. In the wake of Memorial Day and the dedication of the WWII Memorial it is timely in that it honors some of the unsung heroes of World War II. About a month ago my mother received a letter from a serviceman she met in Fayetteville, NC some 62 years earlier. He and his wife were traveling back to their Chicago home after spending the winter in Florida. He wanted to stop by to catch up and especially to say thanks for her contributions during a difficult time in his life and in the lives of so many servicemen.

During the early years of the war, Mom and many of her friends broke from their small-town routines of school work and social activities to board a bus with their chaperones to travel to Fort Bragg, NC. There at a new club formed by the USO (United Service Organizations) they welcomed hundreds and later thousands of new servicemen as they arrived from all over the country. The USO club became a home away from home for the boys who were pressed by global circumstance into manhood overnight. Through their dedication the women of the USO helped keep that transformation in perspective. In so many ways they served as a reminder of what was truly important to these boys and to their country as they trained for war.

This gracious veteran of WWII went well out of his way to say thank you to someone who had impacted his life. We’ve all seen the bumper stickers encouraging us to “Thank a Vet.” This chapter in my Mom’s life reminds me that I, like so many of my generation, was raised by two ‘vets’ of WWII. My dad served in the Navy in the Pacific, while my mom did her part at home. Thanks to you both and thanks to Mr. Smith (name omitted for privacy) for reminding us of the broader contributions to the war effort that continue today.
All in all it’s been a good week for economic news. Oil has been a sore spot, but there is good news there too. OPEC has agreed to increase production while Saudi Arabia has stated that they wish to see a $30.00 per barrel cap for oil. Another factor keeping prices high has been the ‘terror premium.’ Traders fear that bombings and shootings could threaten the oil supply lines. Experts and oil producers say the fears are overblown. If production levels continue to improve, the terror premium should abate. The gasoline component of energy costs is impacted by both the issues just mentioned as well as a lack of refineries in this country. The pressures on supply are seasonal, and will diminish in the coming months. There is no quick answer to the refinery deficit, but the longer gasoline prices stay high the greater the likelihood that more refineries will be built.

Construction spending, led by houses and highways, rose 1.3% in April to a record annual pace of $970.4 billion. The numbers also point to a healthy transition to non-residential construction. It is possible that the eventual slack from the waning in residential building will be made up by commercial construction.

Manufacturing during May surprised economists as the Institute for Supply Management’s factory index rose to 62.8 from 62.4 in April; a reading greater than 50 signals expansion. The index peaked in January at 63.6, the highest since December or 1983. Manufacturers are hiring new workers and buying new equipment to boost production as sales improve. Inventories at the end of the first quarter of this year were at a record low relative to sales, suggesting that factories must produce more products to meet demand. Further evidence that low inventories are having an impact comes from the fact that delivery times are lengthening. Perhaps there wasn’t as much spare capacity (or maybe it was obsolete capacity) as economists earlier thought.

First quarter productivity continues to drive this economy without inflation. The government’s measure of the work done by one employee in an hour showed a 3.8% increase in the first quarter, better than the 2.5% annual increase in the fourth quarter. Productivity increases coupled with higher spending on new equipment and software should allow businesses hold down costs and protect profits. As companies hire more workers though, the increases in productivity should decline somewhat. The government also reported that labor costs are rising, but they still lag inflation according to economists interviewed by Bloomberg. But they point out that wage pressure as a possible contributor to inflation bears watching.

The big news today is that U.S. employers added 248,000 workers to the payrolls in May, helped by the biggest gain in manufacturing employment in six years. According to Bloomberg, the economy has now recouped all the jobs lost in the aftermath of the recession. Payroll employment has increased by 1.2 million so far this year, the best five months of job growth since 2000. Over the last three months, 75.4% of 278 industries surveyed indicated they were hiring, up from 67.4% in April. Rising wages and incomes should keep consumers spending and ensure that the recovery continues on track.

While uncertainties of terror continue to weigh on the minds of investors and will likely do so for years to come, the fundamentals of the U.S. economy continue to improve and more Americans are participating. Experts we follow believe the trend is global. While oil costs have reached record highs, its impact on the world’s recovering economies is likely overblown. In fact, recent trends give reason to believe that conditions will in fact improve. Stocks will likely continue to trade in a range this summer as investors continue to weigh new earnings and economic news. But if trends continue, current prices will prove cheap in the coming months. Bonds will likely give further ground as the economy improves. Please stay tuned.