05 Sep 2003 Recovery on Track

The S&P is up 2% and the NASDAQ is up 3.2% for the week.  Progress continues on the economic front as signs mount that the recovery is fully underway.  The short week following Labor Day started on a high note with ISM Manufacturing rising to 54.7, its highest reading since December.  It was also the second month above 50 signaling thatU.S.manufacturing is growing after four months of contraction.  The Institute’s production index rose to 61.6, the highest in four years.  Inventories are lean so factories must step up production to meet rising demand.  But so far, the increase in factory output has not increased hiring as productivity continues to rise faster than the economy.

Construction spending rose for a second month in July as home building increased.  The increase follows a .7% revised increase in June, more than double the previous estimate from the Commerce Department.  Residential construction, which represents more than half of the total rose .6%, the highest since January.  Economists expect the homes under construction and the backlog of homes yet to be built to underpin construction growth into the coming year even if sales begin to slow, according to Bloomberg.

Auto sales in the U.S. in August hit the year’s fastest pace at a seasonally adjusted annual rate of 19 million units.  Dealer incentives to clear the lots of 2003 models had a big impact on sales, but rising consumer confidence contributed to the increase as well.

The Labor Department revised its productivity number for the second quarter to show a 6.8% increase for non-farm businesses.  That means that companies, especially manufacturers, were able to produce more goods or services with fewer hours worked.  Unit labor costs fell 2.7%.  The Wall Street Journal notes that recent corporate earnings reports reflected the reduction in labor costs as they showed higher profits coming from cost-cutting more than from top-line business growth.  The Journal went on to note that economists have been saying since the spring that the increased productivity means the economy will have to grow that much faster to stem the flow of job losses and prompt managers to re-hire.

The Commerce Department said yesterday that factory orders and deliveries were on the rise in July for the third consecutive month, with especially strong increases for makers of cars and trucks, iron and steel mills, and computer manufacturers.  New orders for manufactured goods increased $5.3 billion, or 1.6%, to $329.4 billion according to the Wall Street Journal.  The Journal also noted that this is the highest level since May 2001.  Shipments increased $8.3 billion, or 2.5%, to $336.9 billion, the highest level since February 2001.  Both confirmed the long-suffering manufacturing sector is getting back on its feet.

Also on Thursday the Labor Department reported an increase in first-time jobless claims.  Some 413,000 people sought unemployment insurance last week, an increase of 15,000 from 398,000 the previous week, and the less volatile four-week moving average rose to 401,500.  Remember, anything over 400,000 indicates the economy is loosing jobs faster than it is creating them.

Today the government announced that the headline unemployment rate dropped one tenth of a percent to 6.1% as more discouraged workers dropped out of the workforce.  The report was better than economists expected, but the loss of 93,000 jobs in non-farm payroll employment was considerably worse than the expected increase of 20,000 jobs.  Manufacturing payrolls declined by 44,000 jobs, closer to the estimated decline of 35,000 jobs.  The Labor Department indicated that job losses continued in the manufacturing and information sectors, while jobs were added in healthcare and construction.

As we have said so many times before though, jobs are a lagging indicator.  Other indicators of the economy’s health are pointing toward growth.  Further evidence comes from managers of major corporations.  John Chambers CEO of Cisco said yesterday that:

“You are seeing a turn-up in business confidence, and it’s been pretty dramatic recently.  We see unusual balance in confidence inEurope.  You’ve got the underlying makings of what is traditionally an economic recovery.  Employment will follow two to three quarters of productivity increases.  The thing missing in this economy is business risk.  My view is that the recovery is starting to occur.  But if businesses don’t take risks, we won’t get the recovery that we expect.”

This morning’s Bloomberg reports that Intel expects its third quarter sales to rise more than forecast previously, combined with higher profit at Best Buy Co. and National Semiconductor Corp. may signal that the three-year slump in computer-related sales is ending.  Businesses generally invest in technology first as it offers a reasonably quick boost in productivity and return on investment.  Stock performance and company news releases from the technology sector continue to support the thesis that the economic recovery is still on track.