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July 4, 2004 -- With the economy on steadier ground and inflation
advancing, the Fed has started tightening monetary policy, as the recent
increase in the federal funds rate demonstrates. Expect more of the same
gradual increases over the next year and a half. While businesses may not
welcome higher interest rates, the good news is that the economy appears to
be moving in the right direction. Industrial production is up, domestic
growth is continuing at a healthy clip, and consumer confidence is strong.
Even employment, which slipped in June, is reaping the benefits of improved
growth. Read more about specific economic indicators in this month's
enewsletter.
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Federal Funds Rate: 1.25%, up 0.25% in June
In a widely anticipated move, the Federal Open Market Committee (FOMC) announced an increase of 25 basis points to the federal funds rate. This is the first move in a year to change the rate and is the first rate increase in nearly four years. The FOMC noted that underlying inflation is still expected to be low, despite recent rises, so a change to the current accomodative monetary policy is expected to be "at a pace that is likely to be measured." The related discount rate also rose, to two and a quarter percent. The next Beige Book will be released on June 16. To view the most recent report from April 21, go to: http://www.federalreserve.gov/fomc/beigebook/2004/20040421/default.htm. The FOMC consists of the Federal Reserve Governors and Reserve Bank Presidents, but only five of the 12 presidents vote with the governors on rate changes. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. (Federal Open Market Committee of the Federal Reserve Board) Click here for more information |
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Real Gross Domestic Product (GDP): Growth rate of 3.9% for 2004Q1, final
(4.1% in 2003Q4)
Gross domestic product grew at a slightly slower rate than expected for the first quarter, due mostly to a downward revision in the trade deficit. As with the preliminary numbers from May, major contributors to growth during the quarter were personal consumption (up 0.6% to 3.8%), exports (down 13.0% to 7.5%), equipment and software (down 5.7% to 9.2%), private inventory investment (down 5.6% to 5.3%), and federal government spending (up from 0.7% to 8.5%). Real final sales of domestic product grew at a rate of 3.2% versus 3.4% in the last quarter of 2003. Gross Domestic Product measures the total production and consumption of goods and services in the United States on a quarterly basis. (Bureau of Economic Analysis) Click here for more information |
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Personal Consumption Expenditures: Growth rate of 3.8% for 2004Q1, final
(3.2% in 2003Q4)
Once again, durable goods numbers were revised upwards, but this segment is still weak, falling 4.4% to -3.7%. Nondurables were up 1.5% to 6.9% and services were up 1.1% to 3.9%. Motor vehicles and parts were down for the second quarter in a row, subtracting 0.7 points from GDP, while furniture and household equipment added 0.31%. Nondurables were again led by food (0.82% of GDP) and clothing/shoes (0.4%), while services were boosted by medical care (0.53%), "other" (0.49%) and housing (0.24%). Personal Consumption Expenditures (PCE) measures consumer-spending activity. (Bureau of Economic Analysis) Click here for more information |
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Industrial Production: 116.9% (of 1997 average), up 1.1% in May
Once again, industrial production beat expectations and grew at its fastest rate since 1998. Final products grew by 0.9%, nonindustrial supplies by 1.7% and materials by 1.1%. Among the major industry groups, manufacturing grew 0.9% and utilities 3.3% while mining shrank 0.4%. Capacity utilization was up 0.6% to 77.8%. Year-over-year, industrial production was up 6.3%. The industrial production (IP) index measures the change in output since 1997 (base year) in manufacturing, mining, and electric and gas utilities in the United States. (Federal Reserve Board) Click here for more information |
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Manufacturing ISM Report on Business: 61.1%, down 1.7% in June
Although coming in below expectations, the manufacturing sector has shown growth (index over 50 percent) for 13 straight months, with eight of those months above 60 percent. All segments were above the critical 50 percent mark, an improvement over previous months. New orders grew at a rate of 60.0% (down 2.8%), production rose 63.2% (down 1.6%),and the backlog of orders increased 58.5% (down 4.5%). Supplier deliveries shrank 1.3% to 68.1% while employment slipped 2.2% to 59.7%. Inventories, which had lagged below 50 percent, grew 51.1% (up 0.8%). Seventeen industry sectors reported growth, including: instruments and photographic equipment; rubber and plastic products; wood and wood products; industrial and commercial equipment and computers; electronic components and equipment; petroleum; fabricated metals; miscellaneous; chemicals; paper; textiles; apparel; primary metals; leather; transportation and equipment; printing and publishing; and furniture. The Institute for Supply Management surveys 400 purchasing managers nationwide representing 20 industries regarding manufacturing activity to create this index. Index values above 50 indicate an expanding manufacturing economy, while values below 50 indicate manufacturing contraction. (Institute for Supply Management) Click here for more information |
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Non-Manufacturing ISM Report on Business: 65.2%, down 3.2% in May
After April's record-setting pace, the services sector took a small breather in May, growing at a rate below expectations but still very strong. This sector has been in growth mode almost continuously since Febraury 2002 (dropping below 50 percent only in March 2003). All segments reported increased activity. New orders grew 61.3% (down 4.3%), employment 56.3% (up 1.8%). supplier deliveries 56.0% (down 2.0%) and inventories 54.0% (down 2.5%). The backlog of orders grew 56.5% (up 3.0%). Fifteen of 16 industries reported growth, the highest rates being in real estate, mining, business services, transportation, and other services. The Non-Manufacturing Business Activity Index is based on the results of a monthly survey of 370 purchasing and supply executives in 62 different industries. Percentages above 50 generally indicate an expanding non-manufacturing economy, while those below 50 indicate a non-manufacturing decline. (Institute for Supply Management) Click here for more information |
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Durable Goods Orders: $189.1 billion, down 1.6% in May
For the second month in a row, durable goods orders tumbled and were well below expectations for moderate growth. Leading this drop-off were fewer orders for transportation equipment (down 4.1%), computers and electronic products (down 1.8%) and fabricated metal products (down 2.4%). Shipments were down 0.7% to $194.2 billion while unfilled orders increased 0.4% to $523.6 billion and inventories rose 0.4% to $268.2 billion. Both defense and nondefense capital goods orders were down, by 10.5% to $7.3 billion and 2.6% to $62.3 billion, respectively. Year-over-year, new orders were up 12.2%. The Census Bureau measures the dollar amount of new factory orders received by U.S. manufacturers. Durable goods are industrial products expected to last more than one year, such as steel, lumber, electronic components, finished industrial machinery and equipment, and finished consumer durable goods. (U.S. Census Bureau) Click here for more information |
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Producer Price Index (PPI): up 0.8% in May
Inflation for finished goods rose slightly faster than expected, led by food and energy costs. Excluding these two categories, inflation only grew 0.3%. For the second month in a row, energy prices increased 1.6%, while food prices grew 1.5%. Prices for intermediate goods were up 1.1% and crude goods were priced 2.8% higher. Year-over-year, finished goods prices rose 5.0%, the largest annualized growth since December 1990. The Bureau of Labor Statistics takes a random sampling of various industries in the mining, manufacturing, agriculture, fishing, forestry, services and utility sectors to measure the average change in selling prices for domestically produced goods and services. (Bureau of Labor Statistics) Click here for more information |
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Consumer Price Index (CPI): up 0.6% in May (SA)
Prices for consumer goods edged up in May at a slightly higher pace than expected, with the core rate (excluding energy and food) only rising 0.2%. Significantly, the core rate for the past 12 months was only up 1.7%, a smaller 12-month rise than in previous months. Among special indices, energy jumped 4.6% and food climbed 0.9%. Leading price hikes in other categories were transportation (up 1.7%) and food and beverages (up 0.9%). Recreation was the only price category that declined (down 0.2%). Year-over-year, prices were up 3.1%. The Consumer Price Index (CPI-U) is a measurement of the average change over time in the prices paid by all urban consumers for specific consumer goods and services, commonly referred to as the rate of inflation. (Bureau of Labor Statistics) Click here for more information |
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Composite Index of Leading Economic Indicators: 116.5 (1996=100), up 0.5%
in May
Meeting expectations, the composite index resumed its path of steady growth in May following lackluster growth in April. The annual change in the index is still 3.5 to 4.0%, in line with expected GDP growth for the second half of the year. Eight of the 10 components of the index were positive, with consumer expectations and stock prices posting negative numbers. The coincident index (current economic situation) again rose 0.3% to 117.6 and the lagging indicator (past situation) again was up 0.1% to 97.9. The Composite Leading Index is constructed as a weighted average of ten key economic data series designed to predict economic conditions in the near term. The index generally turns down before a recession and turns up before an expansion. (The Conference Board) Click here for more information |
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Consumer Confidence Index (1985=100, SA): 101.9%, up 8.8% in June
Consumers roared back in June, elevating confidence to its highest level in two years. Those consumers rating the economy as “good” grew 3.4% to 25.6%, while those rating the economy as “bad” fell 4.1% to 17.5%. More consumers said jobs were more plentiful (up 1.4% to 18.0%) while fewer said jobs were harder to get (down 3.8% to 26.5%). The present situation index soared 14.3% to 104.8% and expectations were up 5.2% to 100.0%. Once again, more consumers plan to purchase a home or major appliace in the next six months while fewer consumers plan to purchase an auto. The Consumer Confidence Survey measures consumer attitude about the performance of the economy using a monthly representative sample of 5,000 U.S. households. Confidence is gauged on respondents’ assessment of such key factors as the business, employment, inflation and income outlook. (The Conference Board) Click here for more information |
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Retail Sales: $335.8 billion, up 1.2% in May
After April's decline, this past month's retail sales recovered as expected. Excluding autos, sales were up 0.7%, with core sales (excluding autos and gas) up 0.3%. Among those posting the largest gains were gas stations (up 4.0%), motor vehicle and parts dealers (up 2.7%) and general merchandisers (up 1.3%). This concentration in auto-related sales suggests the pace of retail growth will not be sustainable into the year. Sales declined for building materials (down 1.4%, but still 16.0% higher than a year ago), furniture and home furnishing (down 0.6%), and food and drink establishments (down 0.3%). Total year-over-year growth was up by 8.9%. Retail sales include merchandise sold (for cash or credit at retail or wholesale) by establishments primarily engaged in retail trade. Services that are incidental to the sale of merchandise, and excise taxes that are paid by the manufacturer or wholesaler and passed along to the retailer, are also included. (U.S. Census Bureau) Click here for more information |
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Employment Situation: 131.3 billion employed in June (Unemployment rate:
5.6%)
June's payroll numbers missed expected growth in the range of 260,000, but still added 112,000 new jobs. Goods producers shed 10,000 jobs, offset by 122,000 jobs created in the services sector. Most of these jobs were in professional and business services (39,000) and education and health care (37,000). The unemployment rate remained unchanged. The Department of Labor conducts the Current Population Survey (CPS) to obtain information about the labor force, employment, and unemployment. The U.S. Census Bureau conducts the survey, which is a random sample of 60,000 households, for the Bureau of Labor Statistics. (U.S. Department of Labor) Click here for more information |
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New Home Sales: 1,369,000, up 14.9% in May
New home sales in May set another new record high and results are in stark contrast to April's steep one-month decline. Sales in the northeast soared 65.3%, while sales in the south and west grew by 20.3% and 6.5%, respectively. Midwest new homes sales remained the same. The average sales price was $256,700 and there is an estimated supply of new homes for 3.3 months. New home sales year-over-year are approximately 25.3% higher. The U.S. Census Bureau and the Department of Housing and Urban Development (HUD) report monthly on the number of new single-family homes built to be sold. (U.S. Census Bureau) Click here for more information |
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For more information about Greater Louisville, go to: http://www.greaterlouisville.com/content/ed/overview.asp Contact Lisa Itamura with comments or suggestions.
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