LEADING INDICATORS
Mood turns cool
For reasons that probably relate to the meltdown of dot-coms and the rocky trail traversed by telecoms, Americans remain remarkably reluctant to embrace a belief in economic recovery.
Perhaps because joblessness has hit 6 percent, the highest in more than seven years, or perhaps because factories retain plenty of excess capacity, each bit of good news inspires waves of skepticism.
Even interest rates that remain at a 40-year low can’t convince everyone.
One bulwark against the doubters has been the index of leading economic indicators. Purportedly able to peer six months or more into the future, it has been pointing to solid economic growth–to the point that some analysts believe the Federal Reserve soon will reverse course and boost rates.
Economist Tim O’Neill expects Monday’s report on the indicators for April to show a flattish number, after a mild gain of 0.1 percent a month earlier. Following strong gains in December and January, the indicators have cooled.
“We are in a transition from economic decline to slow growth to more rapid growth, but that creates a lot of mixed signals and some flopping around of the numbers,” said O’Neill, of Chicago’s Harris Bank and its parent, Bank of Montreal.
In addition, O’Neill said, labor markets have yet to make a serious move to the upside as companies continue to hold back on capital investment.
His bottom line: “There still are some clouds hanging over the economy, but things will improve in the months ahead.”
GDP
Slowing down
Talk of a slowdown nearly evaporated late last month, when the government’s initial estimate of first-quarter gross domestic product showed the economy zipping ahead at a 5.8 percent annual rate. But when experts took a closer look, they realized that a lion’s share of the gain came from companies rebuilding depleted inventories.
They expect the GDP number to notch higher Friday, when the report undergoes a first revision. More important, it will be time to take a serious look at whether growth has slowed in the second quarter.
O’Neill says the rate of expansion has slipped in the second quarter to between 3 percent and 3.5 percent. “Growth has become more modest for several reasons, including a decline in manufacturing hours worked and a modest setback for building permits, which appears weather-related following a very warm winter,” he said.
But such forces are temporary, O’Neill added.
“The consumer remains a very powerful force, as witness last month’s 1.2 percent rise in retail sales,” he said. “For many reasons, growth should ratchet up to a 5 percent rate during this year’s second half.”
DURABLE GOODS
Factories buzzing
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The manufacturing sector continues to pick up momentum; expect Thursday’s report on April orders for durable goods to show a solid gain of 1.7 percent. That’s the prediction of economists at Bank of America in New York, who cite a jump in aircraft orders last month, along with a very healthy pace for car and light-truck sales.
On Friday, they are looking for April new-home sales to show a very small decline, to an annual rate of 875,000 units from 878,000 in March.
EQUITIES
Fairer skies ahead
It has been a cold spring on Wall Street, where the stock market was sent reeling by disappointing first-quarter profit reports. .
Chicago investment manager William Hummer expects corporations to begin showing much better results in the months ahead.
“Last year’s fourth quarter was truly atrocious,” said Hummer, of Wayne Hummer Investments. “While results may not show year-over-year gains of 45 percent, as many analysts are predicting, the upturn for profits will be profound.”