Not Full Speed, But Clearer Sailing Ahead

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.  

Manufacturing jobs are also on the rise.  The decline in factory jobs that started in August of 2000 is now convincingly reversing.  Factory employment has risen for the sixth month in seven, the most increases in four years, according to Bloomberg.  But jobs in the broader economy took a turn for the worse last week as workers filing new claims for unemployment rose to 350,000.  The Labor Department blamed most of the increase on Hurricanes Charley and Frances.

The housing segment, which could not continue at the record pace of the last few quarters, continues to show signs of slowing.  On Monday the National Association of Home Builders said its measure of builder confidence in demand for single-family homes fell from 71 to 68 last month. sales reached a record in May then declined in June and July during what Alan Greenspan called a “soft patch” in the economy.  Despite the slowdown, housing still remains quite healthy and is at a near record pace.  August’s housing starts numbers were surprisingly strong, matching the highest level this year.  The reason for continued strength is that mortgage rates are falling while employment and income are rising, albeit slowly.

Back in late March and early April bond investors panicked when the economic numbers began coming in surprisingly strong.  They dumped long-term treasuries fearing inflation would envelope the economy causing rates to rise dramatically.  Critics of the Fed’s accommodative policy argued that the Fed was ‘woefully behind the rate curve.’  In the two months that followed the 10-year Treasury rate increased more than a percentage point from 3.68% to 4.87%.

But in June the Fed began their ‘measured’ pace of reducing their accommodative policy by gradually raising short-term rates.  Almost immediately long-term interest rates began falling as bondholders’ confidence in the Fed policy returned.  The Fed’s new policy of meeting the inflation threat with appropriate means, combined with the effects of government reports of a moderating economy, served to boost bond investors’ confidence; bond yields and mortgage rates began falling again.  The ten-year bond yield now hovers near 4%.  So far so good, Mr. Greenspan.

Conditions are once again becoming favorable for long-term investors.  Confidence in the growth segments of the economy is returning and inflation fears are abating.  These factors serve to improve stability in the financial markets and allow investors to extend their investment horizons.  Congress’ extension of the tax cuts for another four to six years further boosts the prospects for a favorable investing climate.