10 Oct 2003 Not a “10”
A perfect “10” this recovery is not. On this tenth day of the tenth month business leaders, investors, and economists remain confused by the indicators of this economic recovery. While the government reports are released like clockwork, the information they contain is not quite so predictable. Yes, the overall economic trend remains positive and new data increasingly confirm the trend’s direction, but outliers and contradictions continue to confuse expectations. Fortunately, we are at the early stages of the third quarter earnings cycle. In the coming weeks we will gain a better understanding of the health of American business and their managers’ expectations for the future.
We began the week by learning thatU.S.consumers, representing two thirds of the economy, increased their borrowing in August to make major purchases through auto loans and credit cards rather than mortgage refinancing. The Federal Reserve said that auto loans and credit cards increased by 5% for the month. Consumer spending on new cars and light trucks ran at the third highest rate on record as car manufacturers offered discounts to clear out last years’ models to make room for the new model year. Undoubtedly, the tax rebate checks had some simulative influence in the spending and increased borrowing rate as well.
Business managers continue to be very cautious as demonstrated by wholesale inventories falling to the lowest level of sales EVER. The Commerce Department surprised economists when they reported that Wholesale Inventories dropped by .2% compared to an average expectation of a .1% increase. Low inventories set the stage for a burst of economic growth as companies restock to meet growing demand. Jonathan Basile, an economist at Credit Suisse projects that inventory rebuilding will contribute as much as 1% to fourth quarter GDP growth.
Inflation continues to be a non-threat as demonstrated by the prices of imports. Costs of goods imported into theUnited Statesfell in September for the first time in four months led by the biggest decline in petroleum prices since April, according to Bloomberg. The import price index dropped .5% for the month. But prices are stabilizing. As the U.S. dollar falls non-petroleum import prices will likely increase, stemming the Fed’s concern of deflation and giving domestic producers room to increase prices and, thereby, profits.
But recoveries are never in a straight line and economic indicators don’t’ always confirm each other. Producer Price Index numbers released today show that pricing power remains illusive. U.S.wholesale prices increased .3% in September reflecting the largest increase in costs of vegetables, beef, and other foods since January. Excluding the volatile food and energy prices, other producer prices were unchanged. PPI is an important indicator to watch in regards to jobs. When companies cannot raise prices, they are often forced to layoff workers to maintain profitability. Not until managers see sustainable growth and profitability do they actually begin increasing their capacity, which includes hiring.
But some faint, but positive signs are showing up in the weekly employment statistics. The number of Americans filing initial applications for unemployment fell to the lowest level in eight months last week. That’s the lowest since the week ended February 8th of this year. It may be that the numbers of hires by businesses are finally exceeding the numbers of layoffs. Time will tell.
Finally, the Commerce Department reported today that the trade deficit unexpectedly narrowed to under $40 billion. The 10% drop in the dollar’s value is helping American businesses compete globally as it makes American products less expensive abroad, thereby, improving sales. We have the best of both worlds with a cheaper dollar in that our exports are picking up, but so far, import prices are not rising, adding to inflation worries.
We are nearing the third quarter’s earnings report cycle. Our expectations are for significant upside surprises in many industries, particularly technology, consumer discretionary, and select industrials. The earnings results of these sectors will give us a much better indication of the strength and breadth of the economic recovery. Stay tuned.