13 May 2005 On Balance, Still A Strong Economy

Evidence of short term price pressures continue to arise here and there.  The government reported this morning that imported goods rose in April at twice the expected rate, led by higher costs of automobiles, oils, and steel.  The increase follows a gain of 2% in March, the largest in 14 years.  Most of the rise was in the goods used to make other goods.  But, as we mentioned last week, commodity prices (used to make other goods) are showing signs of peaking.  Import prices for consumer and capital goods actually fell during the month of April.

Richard Yamarone, chief economist at Argus Research pointed out today thatChina’s consumption of raw materials and energy has contributed to price-choppiness in the commodity markets.  They come to market, do their buying, then retreat.  As they pull back, so do energy and commodity prices.  But over time we are seeing a gradual increase in global supplies as the world improves its production and delivery of those commodities, reducing price volatility.

Yesterday, the dollar broke out substantially above its 200-day moving average that has contained it for the past seven months.  It continues its strong rally today climbing 2.6% in the last week.  Also yesterday, gold, an excellent inflation indicator, fell through its 200-day moving average that had supported it for the past 8 months.  It may be telling us that the inflation fears have been overblown and indeed if the trend continues, that long-term inflation, as the Fed says, is not a problem.  And oil prices have dropped steadily for the past four days and are at levels near their 200 day moving average of 47.75.

While the economy is in a ‘soft patch,’ businesses have shown remarkable adaptability to the slowdown as demonstrated by the government report of business inventories, released today.  It reveals that goods on hand rose less than expected in March and only half the rate that business sales increased.  This condition bodes well for business orders and production this quarter as goods will need to be manufactured to meet demand that is clearly there.

And what about this “soft-patch?”  Angst over 3.1% growth last quarter is overdone.  That rate is the AVERAGE growth rate of the economy for the past 20 years.  If the worst of our soft-patch is the 20-year average, we will be just fine, especially when we remember that the economy created 274,000 new jobs last month.  More important than that, the household jobs report (a truer measure of the vitality of our economy) shows record numbers of people starting new businesses.  These jobs are not counted in the payroll reports.

Consumer spending which represents two thirds of our economy remains healthy too.  But if there is a crack in the foundation it is in the blue-collar segment of the population as indicated by a somewhat disappointing quarter for WalMart.  The Nation’s number two discounter Target, reported a 15% increase in net income and beat analysts’ estimates.  Analysts point out that Target outperformed WalMart partly because it offers more fashionable and profitable merchandise, but perhaps more the point, WalMart shoppers have a lower average income and were hurt more by record-high gasoline prices.  But on the whole, jobs are being created at a good clip and people are getting paid more.  Average hourly earnings rose 2.7% in April on a year over year basis.  As their productivity increases, employers are able to pay workers more as they produce more.  On the whole, this economy is firing on all cylinders.