Vital Signs for the Week of May 30

On tap: employment figures for May, business activity reports from the Institute for Supply Management, consumer confidence, and more

Like baseball, shopping has become an American pastime. Indeed, consumer spending accounts for more than 70% of U.S. gross domestic product. Therefore, when consumers don't spend, the economy really suffers.

The role of consumers in the economy is why economists feared a downshift in growth over the first half of the year as oil and natural gas prices surged. But this week's batch of data should only add to the mounting evidence that consumers have enough resources to gas up their vehicles and keep spending.

There has been little let up in consumer spending thanks in part to increased hiring and bigger pay checks. On the heels of a 274,000 jump in April payrolls, economists see an increase of 174,000 new jobs during May. What's more, the revised figures on first-quarter gross domestic product released May 26 showed big upward revisions to wages and salaries in the past two quarters to the tune of $162 billion annualized. That's a lot of cash and helps explain why households have kept shopping.

More jobs and higher wages should help stabilize sagging consumer confidence, although a further decline in the May consumer confidence index is forecast. Lower gasoline prices ahead of the peak summer driving season is also a plus. According to the Energy Dept., national unleaded gasoline prices have fallen for six straight weeks and now reside at $2.13 per gallon. Even though a reported decline in crude oil inventories this week touched off a small rally in crude oil prices, overall inventory levels remain quite comfortable.

All this upbeat news for consumers should put to rest notions that the Federal Reserve will soon take a break. The revised numbers for employee pay do not yet signal a self-sustaining upward cycle of wages and inflation. But the central bank is unlikely to take any chances since the bond market has not responded to the nearly year-long march of quarter-point rate hikes. A fed funds rate that's still historically low, after adjusting for inflation, and increased attention paid to the hot housing market among some members of the central bank only strengthens the case for a steady diet of rate hikes.

Here's the week's economic calendar.

Memorial Day will make for a short week. The financial markets and government offices will be closed on Monday, May 30.

ICSC-UBS STORE SALES

Tuesday, May 31, 7:45 a.m. EDT

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ending May 28. In the week ended May 21, sales slipped by 0.2%, following a 1% dip in the previous week, and a 0.7% gain in the week ended May 7.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, May 31, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the fourth and final fiscal week of May, ended May 28. For the first three fiscal weeks of May, sales were up 2.6% compared with the same stretch in April. For the full month of April, sales were off by 3.9% compared with the full month of March.

CONSUMER CONFIDENCE INDEX

Tuesday, May 31, 10 a.m. EDT

The Conference Board's May index of consumer confidence probably retreated to 96, according to the median forecast of economists polled by Action Economics. In April, the index fell to 97.7, from 103 in March and 104.4 in February.

The April overall index reading hit its lowest point since November. However, consumers showed more optimism in other parts of the survey. The percentage of respondents who said business conditions were good stood at 27%, the most since August of 2001. Perceptions of the labor market have also improved. Those saying jobs were plentiful did slip some in April, but those who think it is hard to find a job continued to decline.

CHICAGO PURCHASING MANAGERS SURVEY

Tuesday, May 31, 10 a.m. EDT

The Chicago-area purchasing managers' index of industrial activity in the Midwest is expected to have dropped. The consensus among economists surveyed by Action Economics is for a reading of 62 for May. In April, the index fell back to 65.6, after an surprise jump to 69.2 in March. In February, the index stood at 62.7.

The production and new orders indexes have both moved in tandem with the overall index this year. In April, the production index fell to 68.9, from 75.8 in March. The new orders index was 71 in April and 76.7 in March. The index tracking backlogged orders eased to 52.4, the lowest level since August of 2004. Overall, the April report and May forecast show that manufacturers in the region continue to see demand rise, but the pace of improvement may be slowing.

EARNINGS REPORTS

ADC, and more.

VEHICLE SALES

Wednesday, June 1

Sales of domestic and imported cars and light trucks over the course of May are expected to slip to an annual pace of 16.7 million vehicles, according to WardsAuto.com. In April, sales unexpectedly surged to a rate of 17.5 million, led by the major Japanese auto makers. In March, sales were 16.8 million. Domestic auto makers are seen holding the line on incentives in order to reduce the flow of red ink.

MORTGAGE APPLICATIONS

Wednesday, June 1, 7 a.m. EDT

The Mortgage Bankers Association releases its numbers on mortgage applications for both home buying and refinancing for the week ending May 27. In the week ended May 20, the purchase index moved up to 482.3, from 469.3 in the previous week, but remained below the 526.2 record level in the week ended May 6. The four-week moving average held at 490 for a second straight week. The average rate on a conventional 30-year mortgage, according to HSH Associates, fell a little more. In the week ended May 20 the rate fell to 5.86%, from 5.9% in the previous period.

The MBA's refi index also showed a small increase. In the period of May 20, the index stood at 2167.9, after falling to 2036.7 in the prior week, from 2263.3 for the week ended May 6. The four-week moving average popped up to 2132.3, from 2103.4 in the week ended May 13.

ISM SURVEY

Wednesday, June 1, 10 a.m. EDT

The Institute for Supply Management's May index of industrial activity probably cooled down a little more. The consensus estimate from Action Economics is for a May reading of 52%. The April ISM reading was 53.5%, from 55.2% in March, and 55.3% for February. Since climbing up to 62.8% in January of 2004, the ISM factory index has trended lower. The current readings still indicate a gradual increase in demand.

The new orders index turned lower, to 53.7%, after rising to 57.1% in March. The number of respondents reporting that order numbers bounced back to 17%, from 14% in March. At the same time, there was a three percentage point decline in the number of respondents who reported a stronger clip of new orders. However, orders from outside the U.S. remained healthy, with a 57.2% reading for April.

The employment index is showing less need for extra workers as the pace of demand moderates. The April index eased to 52.3%, from 53.3% in March and 57.4% in February. The employment index measures the difference between the percentage of employers who hire or fire workers, not the number of workers involved.

CONSTRUCTION SPENDING

Wednesday, June 1, 10 a.m. EDT

Construction outlays most likely kept rising in April. The median forecast from Action Economics is for an April increase of 0.6%. In March, spending rose by 0.5% for a second straight period, after a 0.4% rise in January. Compared with the same period a year ago, construction outlays were up by 8%.

The latest numbers show the housing market continues to be red hot. New home sales grew 0.2% to an annual rate of 1.32 million in April. At the same time, housing starts jumped 11% in April. In March, the Commerce Dept.'s construction spending report showed a 0.3% gain in outlays for private residential structures. In February, spending rose by 1.1%, after a 0.7% increase in January.

MEETING OF NOTE

Thursday, June 2, 10:15 a.m. EST

Federal Reserve Bank of Minneapolis President Gary Stern speaks about his book "Too Big to Fail" at the Conference of State Bank Supervisors in San Antonio, TX.

EARNINGS REPORTS

Ciena, Pall Corp., and more.

CHAIN STORE SALES

Thursday, June 2

The International Council of Shopping Centers will release its May same-store sales figures for major U.S. chain retailers. According to the ICSC, May sales likely grew 3% to 3.5% from a year ago. April same-store sales were up 2.2% from a year ago. More cool weather and pay-back from an early Easter holiday were blamed for the tepid results. The May bounce is based on expectations that Mother's Day sales were strong. Yearly sales last May were a stellar 5.7%.

JOBLESS CLAIMS

Thursday, June 2, 8:30 a.m. EDT

First-time claims for jobless benefits for the week ended May 28 most likely edged up to 328,000. Jobless claims nudged up to 323,000 for the week of May 21, after a small upward revision to 322,000 in the previous week. In the week ended May 7, initial claims stood at 341,000.

The four-week moving average inched up to 330,500, from 330,000 during the previous period. In the week ended May 21, continuing jobless claims slipped down to 2.57 million from 2.6 million in the week ended May 14.

PRODUCTIVITY AND COSTS

Thursday, June 2, 8:30 a.m. EDT

The updated figures on productivity growth for the first quarter, measured as output per hour worked, are likely to show a small upward revision. Economists surveyed by Action Economics expect the revised report to show an annualized rate of 2.9%. The Labor Dept. originally reported productivity growth of 2.6% for the period, following a fourth quarter gain of 2.1%, and a 1.3% improvement in the third quarter of 2003.

As a result of slightly better productivity growth, first-quarter unit labor costs probably grew a little more slowly. The consensus estimate is for a downwardly revised annualized gain of 1.9%. The originally reported increase was 2.2%, after a 1.7% rise in the fourth quarter of 2004. However, revised first-quarter wage and salary data from the Labor Dept. pose some upside risk to unit labor costs.

MANUFACTURERS' SHIPMENTS, INVENTORIES, AND ORDERS

Thursday, June 2, 10 a.m. EDT

Factory orders probably grew at a solid clip in April. Economists polled by Action Economics expect a 1% increase in new orders during April. Orders inched up 0.1% in March, after a 0.5% tumble during February.

The recently published data on durable goods orders showed a 1.9% rebound during April. In February, durable goods orders slumped 1.6%, after a 0.1% decline in January. The April durable goods numbers were fairly strong, even though overall orders less transportation were off 0.2%. Looking at a core measure of orders which excludes defense and aircraft orders, the April gain in orders was 1.6%, after a 1.6% fall in March. A positive factory report may be an indication that manufacturers have gotten beyond any slip in demand resulting from higher oil prices and uncertainty regarding economic growth.

EMPLOYMENT REPORT

Friday, June 3, 8:30 a.m. EDT

Economists believe companies continued to add workers at a decent clip in May. The median forecast from Action Economics is for an increase of 175,000 jobs in during the month. In April, payrolls swelled by 274,000, following a gain of 146,000 in March, and 300,000 in February. However, the unemployment rate didn't budge from its March level of 5.2%. In February, the jobless rate stood at 5.4%.

A small loss in factory payrolls is expected. Economists are forecasting 2,000 new manufacturing jobs were created in May. Factory employment ticked lower in seven of the past eight months in spite of growing demand for capital equipment and other factory goods. Among the more positive aspects of the April labor report was the longer average workweek and, from the perspective of workers, the rise in average hourly earnings. Both are likely to ease a little in May. The average workweek is expected to come in at 39.8 hours vs. 39.9 hours in April. The average hourly pay is forecast to increase 0.2%, after a two straight monthly gains of 0.3%.

ISM NON-MANUFACTURING SURVEY

Friday, June 3, 10 a.m. EDT

The Institute for Supply Management releases its May index of business activity in the mostly services, non-manufacturing sector. Economists queried by Action Economics are forecasting a small decline in the index, to 60.4%. The April index eased to 61.7%, after shooting up to 63.1% in March, from 59.8% in February.

The new orders index also fell back in April, to 58.8%, from 62.1% in March. Nonetheless, new orders appear to be increasing enough among the mostly service-sector businesses to keep unfilled orders growing. The April reading for unfilled orders was 54%, compared with 56.5% in March. A reading above 50% means more respondents than not said unfilled orders rose during the month.

The prices paid index for non-manufacturers rose yet again. The April reading was 61.9%, off slightly from 65.6% in March, and 66.4% in February. While the latest number was lower, not one industry covered in this survey reported lower prices and only 2% of respondents said they paid less for materials and services. The results correspond with the uptick in inflation and the Federal Reserve's cautious position on price pressures.

By James Mehring

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