Econ Slows, Rate Odds Ebb ... Bonds jump on jobs, equities don't Econoday Simply Economics 8/4/00 By Evelina M. Tainer, Chief Economist

Equities in summer doldrums
It wasn't a particularly good week for the stock market. Tech stocks were generally in the dumps. Every time the NASDAQ Composite tried a run higher, it came back down the subsequent day. While the Dow Jones Industrial Average remains weaker than the S&P 500 and the Russell 2000 relative to year-end, it showed some improvement this past week. Yet into the eighth month of the year, the four major indices are all below year-end levels. The Russell 2000 is only 0.2 percent below December 31 levels while the S&P 500 is 0.4 percent below. As indicated in the chart below, both the Dow and the NASDAQ are nearly 7 percent underwater.

Statements by U.S. Treasury officials major market mover
Since the beginning of the year, Treasury yields (prices) have just as often reacted to supply issues as economic fundamentals. A good chunk of the movement in Treasury prices this year has been due to the changing structure of the government's borrowing needs. This week the Treasury announced its refunding package for the quarter. Generally, the size of the 5- and 10-year notes was generally in line with expectations. However, bond investors were somewhat "disappointed" that the Treasury didn't decide to eliminate the 30-year bond entirely. This caused some flurry of activity at mid-week. The buybacks are going to continue on schedule every third and fourth Thursday of the month. The Treasury also intends to eliminate the 52-week bill soon, but will keep the quarterly schedule for now.

The employment situation eased fears that the Fed would raise rates at the August 22 FOMC meeting. As a result, yields declined across the spectrum of maturities on Friday to their lowest level of the week.

Markets at a Glance
Treasury Securities	12/31/99	July 28	Aug 4	Weekly Change
30-year Bond	6.48	5.78	5.71	- 7 BP
10-year Note	6.43	6.04	5.90	- 14 BP
5-year Note	6.34	6.15	6.01	- 14 BP
2-year Note	6.24	6.28	6.13	- 15 BP
Stock Prices
DJIA	11497*	10511*	10768*	+ 2.4 %
S&P 500	1469*	1420*	1463*	+ 3.0 %
NASDAQ Composite	4069*	3663*	3787*	+ 3.4%
Russell 2000	505*	490*	504*	+ 2.9 %
Exchange Rates
Euro/$	1.0008	0.9240	0.9082	- 1.7 %
Yen/$	102.40	109.71	108.52	- 1.1 %
Commodity Prices
Crude Oil ($/barrel)	$25.60	$28.20	$29.92	+ 6.1%
Gold ($/ounce)	$289.60	$284.30	$278.70	- 2.0 %
(BP = basis points; stock price indices are rounded)

Employment trends lower
Nonfarm payroll employment fell 108,000 in July after an upwardly revised gain of 30,000 in June. Declining levels of temporary Census workers dampened these anemic employment figures. Excluding Census workers, nonfarm payrolls rose 182,000 in July after a more modest 168,000 gain in June. The chart below depicts the monthly changes in nonfarm payrolls along with a 3-month moving average, which excludes Census workers for the relevant period (January to July are noted as green bars in the chart). Even if the latest three-month average overstates the weakness, Fed officials can't argue too strongly that the economy had not slowing down.

The moderation in nonfarm payrolls came mostly from the service-producing sector where gains were generally modest, while the important business & health services component actually remained unchanged for the month. In contrast, factory payrolls jumped 46,000 - a far cry from the sluggish behavior of the past several months. Labor Department officials weren't sure whether changing seasonal factors or actual gains in demand boosted manufacturing employment. The chart below depicts yearly gains in factory payrolls relative to annual increases in factory orders. Note that the trend is pointing upward in both cases and these two series have moved together historically. The upward trend in new orders does correspond with the upward trend in manufacturing employment. Perhaps this will be sustained past the summer months.

The civilian unemployment rate remained unchanged at 4 percent in July. Both the labor force and household employment fell during the month. Greenspan & Company are likely to be reassured with the modest rise in the pool of available labor. But despite the rise in July, this series nevertheless is exhibiting a strong downward trend. It will take more than one month's rise to motivate the belief that labor markets are no longer tight.

Average hourly earnings rose 0.4 percent in July after posting smaller gains in the past couple of months. This put the yearly rise at 3.7 percent, up from the past two months. Yet, as indicated in the chart above, the yearly uptick in average hourly earnings still falls within the range of the past twelve months and is not showing strong signs of acceleration.

The bottom-line on the employment situation? The employment situation for July reveals that the trend towards more moderate employment growth, which began a few months ago, has continued. In addition to the slower pace of employment growth, the average workweek is also exhibiting some downward drift suggesting that total hours worked in the economy is indeed less robust that earlier this year. The civilian unemployment rate has stabilized at 4 percent for the past nine months. While average hourly earnings ticked higher in July, the trend here is nearly constant for the past several months as well. Even Labor Secretary Alexis Hermann noted that productivity gains are likely to offset the rise in wages (and alleviate potential inflationary pressures). These figures will go a long way in reassuring Fed officials that the rate hikes of the past year are indeed hampering economic growth. This could keep the Fed on hold at the August 22 FOMC meeting.

Consumer sector moderating ... on the whole
The Fed is scrutinizing indicators that reveal some moderation in consumer demand. The signs were mixed. New home sales fell 3.7 percent in June to an 829,000 unit pace - their lowest level since December 1997. Sales are down sharply from year ago levels. This is in contrast to existing home sales, which posted a modest gain in June. Total sales were up slightly in the second quarter, but there is no question that the trend in single family home sales is down from its peak. Incidentally, the drop in new home sales signals, more dramatically than existing home sales, the decline in demand for new single family construction. Single family housing starts have been heading lower these past several months.

Motor vehicle sales are also on a decided downward trend since reaching a peak in February. Though light truck sales ticked higher in July, they were weaker in May and June, while autos have sold at a 6.8 million-unit rate for the past three months. Despite the moderation in car and truck sales the past several months, there is no question that the overall sales pace remains high.

Overall consumer expenditures have moderated in the past several months. Personal consumption expenditures posted an average increase of 0.2 percent in the past four months through June. This is just slightly lower than the average gain of 0.25 percent for disposable income over the same period. As indicated by the chart below, the gap between income and consumption doesn't seem to be narrowing. The personal savings rate dipped to 0.1 percent in June after reaching 0.3 percent in the previous two months. As long as consumers don't pick up their savings, it reflects a strong sense of optimism about the economy. Even though stock prices are down from year-end levels, they clearly aren't weak enough to entice consumers into a more austere savings program.

The bottom-line on the consumer sector? Consumer demand is not as robust as it was earlier this year. Even with declines in home sales and motor vehicle sales, though, overall levels are still fairly healthy by historical standards. Consumer indicators generally suggest a sufficiently slower pace of growth, likely satisfying Fed officials (at least for the time being) into leaving the federal funds rate target unchanged at the August FOMC meeting.

Manufacturing: a mixed bag
Factory orders jumped 5.5 percent in June after a pretty healthy 4.7 percent gain in May. The bulk of the new orders could be attributed to defense where they nearly tripled in June! But even excluding defense, nondefense capital goods orders surged 16.5 percent in June. Private aircraft orders picked up steam during the month. But a quick rundown of the major components (primary metals, industrial machinery & equipment, electronic components and transportation) reveal increases in the key categories.

In contrast, the NAPM survey was unchanged in July at 51.8. This put the June and July figures at their lowest level since January 1999 when the index dipped below the 50 percent mark. Most of the NAPM components posted declines for the month, although many series remained above 50 percent. The new orders index, however, did dip to 49.9 percent in July - perhaps suggesting that factory orders have peaked in the second quarter. It remains to be seen whether this is just a one-month dip or the beginning of a new downward trend.

The NAPM's prices paid component edged up to 61.9 in July from 61.2 in June. Despite the uptick, the level is down from its peak of a few months ago. This still mostly reflects higher energy prices. Other raw materials prices may have increased modestly as well. Fed officials would surely like to see this index come back down below the 50 percent mark.

THE BOTTOM LINE
This week's set of news was a mixed bag of tricks for market players, economists and government policymakers. July's employment report revealed that economic activity is indeed moderating. The employment statistics usually set the tone for the month and these do point to slower income growth. The manufacturing sector improved somewhat and suggests industrial production might strengthen in July.

Consumer indicators were both better and worse than the previous month. Motor vehicle sales were up slightly in July from June, but remain well below the February peak. Sales of new single family homes did drop to their lowest level in over 18 months, but the quarterly pace of total single family home sales (including existing homes) rose modestly during the second quarter. Again, sales are well below the peak reached late last year.

The only piece of inflation news (aside from the purchasing managers' surveys) was a 0.4 percent rise in average hourly earnings. This led to a slight uptick in the year-over-year gain, but at 3.7 percent this remains in line with recent months. This alone shouldn't be the sole reason for a Fed tightening in August.

Several more key economic indicators are scheduled for release before the August 22 FOMC meeting. These include retail sales for July as well as the PPI and CPI for July. Scary inflation numbers with a rebound in retail sales might possibly cause some concerns among Fed officials that would lead to a rate hike. But moderate numbers as we've seen should keep the Fed on hold.

Looking Ahead: Week of August 7 to August 11
Market News International compiles this market consensus which surveys about 20 economists each week.

Monday
Economists are predicting that consumer installment credit will expand by $8 billion in June, less than the $11.8 billion spurt posted in May. (Forecast range: $6.0 to $10.0 billion)

Tuesday
Nonfarm business productivity should grow at a 4.5 percent rate in the second quarter after expanding at a more moderate 2.4 percent rate in the first quarter. This reflects the 5.2 percent spurt in GDP growth coupled with the more moderate pace of employment growth during the period. (Forecast range: 3.4 to 5.5 percent) Unit labor costs are expected to inch up 0.4 percent in the second quarter after rising at a 1.6 percent rate in the first quarter. Labor costs remain subdued despite tight labor markets. (Forecast range: - 0.4 to 1.0 percent)

Wednesday
The Fed's beige book, which covers anecdotal evidence through roughly July 31, will be reported in the afternoon. Market players will look for news of softer retail sales coupled with no acceleration in wages or prices.

Thursday
Market participants are expecting new jobless claims to rise 10,000 in the week ended August 5 from last week's 276,000 level. Claims are likely to be rather volatile in the next several weeks since summer factory shutdown schedules are not exact from year to year. (Forecast range: +4,000 to +15,000)

Friday
The consensus forecast is looking for no change in July's producer price index. (Forecast range: - 0.3 percent to + 0.3 percent) Excluding the volatile food and energy component, the PPI is expected to post a more moderate rise of 0.1 percent. (Forecast range: unchanged to + 0.2 percent)

Retail sales are expected to rise 0.4 percent in July after gaining 0.5 percent in June. Auto and truck sales were running at nearly the same pace as last month. (Forecast range: + 0.2 percent to + 0.7 percent) Excluding the auto group, retail sales should also increase 0.4 percent in July after a modest 0.2 percent gain in June. (Forecast range: + 0.1 percent to + 0.5 percent)