26 Mar 2004 Employment Is Improving
If the majority of Americans feel uneasy about their employment status as the media and certain politicians claim, they don’t show it when it comes to buying homes and taking on larger mortgages. New home sales for February surprised to the upside while mortgage applications were down only .2% from historic highs. Both Fannie Mae and Freddie Mac, the nation’s two largest purchasers of mortgages, are forecasting another record year for home sales amid low interest rates. The 30-year fixed mortgage is within a half a percent of the all-time low.
Orders for goods made to last at least three years increased 2.5% last month. Led by computers, motor vehicles, and aircraft, the report provided evidence that that the long-awaited pickup in business spending is beginning. More businesses were unable to keep up with demand last month as evidenced by a .7% increase in unfilled orders for business equipment. That was the biggest increase since October.
The final report of Gross Domestic Product for theU.S.economy showed growth of 4.1% for the fourth quarter without revision. With the third quarter’s growth of 8.2%, the second half of last year saw the fastest growth in twenty years. The report did, however, upwardly revise consumer spending and lowered the levels of inventories reported to satisfy that demand. To replenish these inventories companies will have to turn out more goods than they currently do. Existing workers are stretched to the limits; new hires can’t be far off.
The weekly jobs reports confirm the assertion that employment is indeed improving. While new job creation doesn’t leap dramatically from the reports, it is evident that job losses are declining. In fact, as Greenspan says, our economy creates thousands of new jobs each week to replace those that are lost for various reasons. New job creation is finally catching up and may soon exceed the rate of job destruction.
Both initial jobless claims and continuing claims were lower this week. As you can see in the graph below, initial jobless claims have been declining rather steadily for the past 12-months.
Evidence suggests that the economy, hence corporate profits, continue to improve. In fact, we expect this round of quarterly earnings reports to far exceed analysts’ expectations. Stock prices should respond favorably as these reports come in. Many on Wall Street worry about when and by how much the Fed will raise interest rates. They argue that rates must rise because they are at inflationary levels. But with oil in the mid-30’s and commodities rocketing higher under heavy demand from China, U.S., and Japan, inflation has not crept into either commercial or retail prices (aside from energy) due to the continued gains in productivity. We believe these trends will persist and that the Fed will indeed eventually raise rates, but do so conservatively to avoid damaging the fragile recovery. We continue to expect a pretty good year for investors – in the range of 10-15% returns for the S&P 500.