Vital Signs for the Week of May 31

On tap: The May employment report, May business activity surveys from the Institute for Supply Management, April data on factory orders and inventories, and more

The economy expanded at annual pace of 4.4% during the first quarter of the year. So far, there is every reason to believe such a pace can be repeated in the current quarter. Indeed, many economists have penciled in real gross domestic product growth at or slightly above 4% for the rest of the year.

Two key facets of the economy should help keep growth on track: the labor market and the revival of the manufacturing. According to economists surveyed by Action Economics, non-farm businesses probably hired another 220,000 workers in May, on top of the 867,000 new jobs created so far this year.

The May ISM business activity surveys also should show that many businesses are in a full-fledged hiring mode. The April ISM manufacturing survey reported that 21% of respondents increased hiring in April, and the overall employment index came in at 57.8%, the highest reading since the final month of 1987. The non-manufacturing report, made up mostly of service-sector businesses, showed that 30% of respondents increased payrolls in April, with the overall employment index rising to 54.5%.

The healthy pace of hiring should stimulate consumer spending. As payrolls rise, so will wages. Indeed, wages and salaries climbed 0.5% in April, according to the Commerce Dept.'s April personal income report, which showed that overall personal income increased by 0.6%.

The current upswing the economy, however, includes more than just consumers. Businesses have increased investment in both equipment and inventories. That's a big reason why manufacturing is finally out of the doldrums. The consensus forecast for the headline ISM factory activity index is 62%, up from 50% in May of last year.

New orders for manufactured goods probably slipped in April, but that follows hefty jumps of 4.3% in March and 1.1% in February. Even with an April dip in orders, the backlog of unfilled orders increased over the same period. Manufacturers don't appear able to keep up with demand. In addition, businesses and factories are also rebuilding inventories now that demand looks strong and stable. That will add an extra layer of activity for manufacturers.

Memorial Day will make for a short week. The financial markets and government offices will be closed on Monday, May 31.

Here's the week's economic calendar.


Tuesday, June 1, 10 a.m. EDT

The May index of industrial activity from the Institute for Supply Management probably slipped to 62%, according to the consensus forecast of economists queried by Action Economics. In April, the index eased to 62.4%, from 62.5% in March. The May forecast would still be in line with healthy factory activity.

The index components were also quite positive in April. In April, the survey showed production accelerated. The new orders index stood at 65%, from 65.7% in March. The percentage of respondents that reported further increases in orders actually inched up to 51%, from 50% in March. Respondents also said the level of unfilled orders grew at a quickening pace. The April index level was 66.5%, up from 63.5% in March, and from 62% in February. New orders are coming in a rapid pace and manufacturers are struggling to keep up.

Manufacturers once again reported a long list of commodities and raw materials rising in price. According to the ISM, "almost every category of product has seen price movement." The prices paid index soared to 88% in April, from 66% in December. In April, 77% of respondents reported higher prices, with only 1% saying costs had fallen during the period.


Tuesday, June 1, 10 a.m. EDT

Outlays for new buildings probably increased 0.5% in March. That's the consensus of economists surveyed by Action Economics. In March, construction spending shot up 1.5%, after a 0.4% gain in February, and a 0.4% drop in January. The big March gain was helped by a 5.2% jump in government construction spending, and a 13.6% surge in office construction within the financial sector.

Private homebuilding has been the driving the headline construction figure. In the past year, private residential construction has grown by 19.9%. Excluding this sector, construction spending would be up just 2.1% over the past twelve months through March, compared to 7.9%.

However, the pace of residential building may cool off a little as interest rates keep rising. So far, that hasn't happened and good job growth should be a positive offset to higher rates.


Wednesday, June 2, 10 a.m. EDT

The U.S. Business Roundtable releases its quarterly CEO Economic Outlook Survey in Washington, D.C.


Albertson's, Nieman Marcus, and more.


Wednesday, June 2

Sales of domestic and imported cars and light trucks in May are forecast to have risen to an annual pace of 16.7 million vehicles, according JP Morgan Chase. However, there are more optimistic views, such as the 17 million pace expected by Ward's Automotive Reports. In April, sales eased to 16.4 million, with a large part of the blame put on manufacturer's efforts to hold back on incentives.

Overall, vehicle inventories are still quite high and an incentive driven push to get 2004 model year vehicles out the door appears likely. In March, sales moved up to 16.7 million, from an annualized rate of 16.4 million vehicles in February.


Wednesday, June 2, 7 a.m. EDT

The Mortgage Bankers Assoc. releases its tally of mortgage applications for both home buying and refinancing for the week ending May 28. In the week ended May 21, the purchase index fell to 449.8, from 454.2 in the previous period, and 494.3 for the week ended May 7. The latest reading of the four-week moving average also slipped. For the week of May 21, the average stood at 470.2, from 473.6 over the period ended May 14.

The average rate on a conventional 30-year mortgage, according to HSH Assoc., eased to 6.41% for the week of May 21, from 6.49% in the week ended May 14. Expectations of a move by the Federal Reserve is likely to push mortgage rates higher in the coming weeks and months.

The refi index kept falling in the week ended May 21, to 1694.9, from 1816.9 in the week earlier and 2184.6 in the week ended May 7. The refi index four-week moving average dropped to 2053.1, from 2230.1 in the week ended May 14.


Wednesday, June 2, 7:45 a.m. EDT

This weekly tracking of retail sales, assembled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ending May 29. In the week ended May 22, seasonally adjusted sales fell 0.5%, following a 0.8% slide in the previous week, and a 0.3% increase for the week ended May 8.


Wednesday, June 2, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the third fiscal week of May, ended May 29. In the first three weeks of May, ended May 22, sales stood 0.5% higher when compared with the April level. For the full month of April, sales were off 2.3% compared with March.


Thursday, June 3, 10 a.m. EDT

U.S. President George W. Bush meets with Australia's Prime Minister John Howard in Washington, D.C.


Elizabeth Arden, Mandalay Resort Group, Pathmark Stores, and more.


Thursday, June 3

The International Council of Shopping Centers will release its May same-store sales figures for major U.S. chain retailers. In April, receipts increased by 4.4%, building upon the 7% jump from a year ago in March, the 6.7% gain in February, and a 5.8% rise in January. The strong pace of growth over the past four months is very positive on top of the Commerce Dept.'s data on retail sales -- up 8% from a year ago in April.

The keys to continued strength in retail sales lie in how consumers respond to the improving labor markets and the rising costs of energy. The May consumer confidence report showed virtually no change. "The pickup in the job market is offsetting the impact of rising gas prices and escalating tensions in Iraq," according to the Conference Board. Consumers have been shopping at a pretty good clip so far this year despite their subdued outlook. Thus, the Conference Board's reading provides little reason to believe consumers won't keep spending.


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

First-time claims for jobless benefits for the week ended May 29 probably fell to 338,000. That's the median forecast of economists surveyed by Action Economics. Jobless claims dipped to 344,000 for the week ended May 22, after climbing to an upwardly revised 347,000 in the week ended May 15.

The four-week moving average inched up to 335,500 for the week ended May 22. In the week ended May 15, the four-week average slipped to 334,000. During the week ended May 15, continuing jobless remained below the 3 million level for a fourth straight week, easing to 2.95 million, from 2.93 million in the period ended May 8.


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

Productivity growth in the first quarter, measured as output per hour worked, is expected to be revised slightly higher, to 3.8%, from the originally reported increase of 3.5%. In the fourth quarter, productivity growth was 2.5%, following a third-quarter surge of 9.5%, and a second-quarter increase of 6.2%.

First-quarter unit labor costs probably grew by 0.3%, after holding steady in the fourth quarter, and dropping 4.3% in the third period of 2003.

More jobs are certainly good for the economy, but rapid gains in payrolls could push up unit labor costs. If that happens, it could have an impact on interest rates. Federal Reserve Chairman Alan Greenspan has pointed to falling unit labor costs as a reason why inflation is not yet a major concern for him. Labor costs make up, on average, some two-thirds of a company's total costs.

If job gains weigh on productivity growth, labor costs per item produced will also begin to creep up. That could add to pricing pressures. Such a scenario, however, still looks some ways off. Unit labor costs were still off 1.3% from a year ago in the first quarter.


Thursday, June 3, 10 a.m. EDT

Factory orders most likely retreated by 1.6% during April, according to the consensus forecast of economists queried by Action Economics. These data are volatile from month to month, and an expected decline would follow strong results in the prior two months. In March, orders surged 4.3%, after 1.1% gain in February.

New orders for the durable-goods segment of factory orders in April are already reported to have been down 2.9%, following big gains of 5.7% in March, and 3.9% in February.

Even with the anticipated April breather, manufacturers will likely have to keep increasing output. Unfilled orders for durable goods rose by another 0.6% in April, and by 7.2% from the same period a year ago. In addition, the inventory-to-sales ratio for manufactured goods is extremely low. The simultaneous efforts of keeping up with demand and the rebuilding inventories are now helping to push up output.


Thursday, June 3, 10 a.m. EDT

The Institute for Supply Management releases its May index of business activity in the non-manufacturing sector, mostly services. The median forecast of economists surveyed by Action Economics has the May reading coming in at 66%. In April, the index hit another record reading of 68.4%, breaking the previous high of 65.8% in March, and 60.8% in February.

The new orders index showed an acceleration in demand, with the index hitting 65.6%, from 62.8% March. As with manufacturers, unfilled orders are also growing at an increasing speed, a probable indication that businesses can't keep pace with demand. Indeed, the percentage of respondents who thought their inventory levels were too low rose back to 10% in April, after sinking to 5% in March.

Non-manufacturers are also feeling greater price pressures. The index tracking prices paid by respondents kept climbing. The April index hit 68.6%, after climbing to 65.7% in February, from 57.3% in February. The percentage of those surveyed who said prices paid for materials and services hit 53% compared with 43% in March.


Friday, June 4

U.S. President George W. Bush travels to Rome to meet with Italian Prime Minister Silvio Berlusconi and Pope John Paul II.

12:30 p.m. EDT

Federal Reserve Board Governor Donald Kohn addresses the National Economists Club in Washington, D.C.


Friday, June 4, 8:30 a.m. EDT

Economists surveyed by Action Economics are forecasting a solid increase in May payrolls of 220,000. In April, the Labor Dept. reported 288,000 new jobs, after a gain of 337,000 in March, and an 83,000 increase in February. In addition, the unemployment rate is expected to have held at 5.6%.

Factory payrolls probably added 20,000 positions in May, after a gain of 21,000 jobs in April, and an increase of 9,000 jobs during March.

The average workweek is expected to inch up to 33.8 hours, from 33.7 in April. Longer workweeks are an indication that labor markets are improving, especially when payrolls are on the rise. Meanwhile, average hourly earnings are forecast to have risen by 0.2%, following a 0.3% rise in April.


Saturday-Sunday, June 5-6

U.S. President George W. Bush meets with French President Jacques Chirac in Paris and visits Normandy to celebrate the 60th anniversary of the D-Day invasion.

Sunday-Wednesday, June 6-9

The Biotechnology Industry Organization hosts the BIO 2004 Annual International Convention in San Francisco. Speakers will include Dept. of Health and Human Services Secretary Tommy G. Thompson, Genentech CEO Arthur Levinson, Dr. Leroy Hood of the Institute for Systems Biology, and others.

By Jim Cooper

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