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Smokestacks recover,
but wide gap remains
The NASDAQ composite index rose 323 points this week and now stands more than 20 percent above year-end levels. As the NASDAQ composite reaches a new record level nearly daily, it has become ho-hum news. Perhaps the more interesting story is that the Russell 2000 - the primary index of small-capitalization stocks - is rising in tandem with the NASDAQ. Not all the small cap stocks are tech stocks either. Employment
surprise not as euphoric for bond investors Added problems in the Treasury market stem from the proposed changes in the Treasury's borrowing needs, and many are wondering how the buyback (of 30-year Treasury bonds) will work in the near term. Supply issues are certainly clouding the fundamentals these days.
Employment
surprise only hints of slowdown
The most surprising element in the payroll figures was a tiny 62,000 gain in the service-producing sector. The two-month average gain in the service sector was off by nearly 100,000 from the average for the fourth quarter of 1999. While it is certainly possible that this is reflecting a lack of skilled labor, one wouldn't want to conclude that service-sector employment is softening on just a couple months of data at this time of year. In any case, the chart above shows that the three-month moving average of total nonfarm payroll growth remains in the same healthy range as the past four years.
The civilian unemployment rate inched higher to 4.1 percent in February after a brief dip to 4 percent last month. Despite the fact that the jobless rate remains steady these days, Fed policymakers remain concerned about tight labor markets. Greenspan's favorite indicator, which measures the pool of available workers, increased in February. It was a great headline number for the bond market this morning, but basically offsets declines of the previous two months. The supply of labor is basically where it was before year-end. The low unemployment rate worries Fed officials because it sets the stage for accelerating wage demands. Yet, average hourly earnings rose 0.3 percent in February, in line with the past several months. The chart above shows that average hourly earnings gains are well below their peaked - reached two years ago. In February, average hourly earnings were 3.6 percent above year ago levels. As long as earnings rise in line with productivity gains, then wage hikes aren't inflationary. We won't see first quarter productivity figures for a few more months, but in the second half of 1999, nonfarm productivity grew at a 5 percent rate. The bottom-line on employment? Headline data on the employment situation was less-than- predicted by economists. As a result, bond and equity markets rallied on the news which showed that economic activity may be moderating - and creating a friendlier environment for the Fed. That is, one in which Fed rate hikes might be less aggressive than previously anticipated. In any case, market players are still looking for a 25 basis point hike in March and probably one in May as well. Whether a third hike will come at the end of June is becoming more questionable. Lest investors become overly optimistic about February's employment report, it is useful to look at total hours worked in the economy in January and February relative to the previous quarter. Note that hours-worked are on par with the October-to-December period. Productivity is the missing link between GDP and hours worked and it may not be as healthy as late last year. But the first quarter is shaping up to show pretty solid growth, albeit not at a 6.9 percent rate like last quarter.
Factory
orders healthy despite January dip
Manufacturing orders aren't the only indicator showing improvement. The NAPM survey edged up in February to 56.9 after a slight dip in January. But as indicated in the chart below, the NAPM diffusion index has remained at healthy levels above 55 percent since last September. The only fly in the ointment is the corresponding rise in the prices paid index, which generally mirrors crude oil prices.
The bottom-line on manufacturing activity? New orders for manufactured goods, the NAPM survey, and even factory payrolls are all pointing to improved conditions in production in the next few months. An accelerated pace of production growth could cause some anxiety among Federal Reserve officials who are hoping to see some moderation in the rate of overall economic growth. Mixed
bag of tricks for the consumer
One wouldn't know that consumer spending was supposed to moderate judging by the burst of activity in motor vehicle sales. Domestic cars were sold at a 7.6 million unit rate in February - its fastest pace since last August. Light trucks were sold at a whopping 8.6 million unit rate - off the charts! Granted, it is useful to note that GM had issued "loyalty" certificates to its customers worth $500 off the price of a new car. Nevertheless, auto incentives are relatively common these days and don't explain the entire spurt in car and truck sales in February. Incidentally, spending on motor vehicles is a much more reliable indicator of consumer sentiment that confidence measures since consumers put their money where their mouth is!
Personal income did outpace spending in January, for a change. As a result, the personal savings rate gained a few ticks. But before you get excited about the turnaround in the savings rate, it is worth noting that income gains were spurred by cost-of-living increases for government workers and social security recipients. This is a typical occurrence in January. The gap between yearly growth in income and consumption is as wide as ever as indicated in the chart below.
The bottom-line on the consumer? Economic indicators are showing only modest evidence that interest rates matter - though past rate hikes have indeed slowed down the economy. Housing activity is off its peak. If mortgage rates remain stable or edge up further, we could see additional declines in home sales and housing starts in the next few months. Nonetheless, economists are not predicting that the housing market will collapse any time soon. Auto and truck sales are also affected by interest rates, as they are big-ticket items. Sales are as robust as ever. Spending might be curtailed somewhat with additional rate hikes this month and next, yet consumers remain euphoric. Certainly, consumer sentiment surveys are showing a high level of optimism, but the fact that the personal savings rate continues to head down suggests that consumers don't expect they'll need a savings cushion any time soon. THE
BOTTOM LINE After all is said and done, the February employment situation wasn't all that anemic. One shouldn't look at a single month's report in a vacuum. So far, the first quarter is shaping up to show pretty healthy growth, albeit not as significant as the nearly 7 percent rate seen in fourth quarter real GDP. Economic data is sufficiently strong that the Fed will not think twice about raising rates at the FOMC meeting on March 21. Indeed, Fed officials may even be inclined to raise rates at the May 16 meeting. But the policymakers do realize that the impact from a rate change is gradual and cumulative. This means that rate hikes are not assured if economic data is more decidedly moderate. Looking
Ahead: Week of March 6 to 10 Tuesday Consumer installment credit is predicted to moderate substantially in January. The consensus forecast is looking for a rise of $8 billion in January, down from the $15.8 billion rate recorded in November and the $11.2 billion pace posted in December. Wednesday Thursday Week
of March 13 to 17 Wednesday Thursday Friday |
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