MANUFACTURING
Signs of a stirring
Although there is plenty of talk about the economic recovery gathering a head of steam, the nation’s manufacturers see their furnaces still banked.
Employment in factories has been declining for three years, with work being farmed out to other countries, notably Mexico and China. Machinery sits idle.
A report last week showed only 74.3 percent of industrial capacity was being used in May, the slowest pace of production since 1983.
Yet recent indicators are telling a story of manufacturing on the march, with signs that a significant pickup may occur in the months ahead.
Economist Lynn Reaser expects Wednesday’s report of May orders for durable goods to show a jump of 1.2 percent, partially reversing a seesaw pattern over recent months.
“Companies were very cautious in April, coming out of the Iraq war, but May will show definite signs of improvement for the manufacturing sector,” said Reaser, of Banc of America Capital Markets in St. Louis.
Factory orders will get a jump-start, she said, as recently enacted tax cuts kick in. They provide incentives for small businesses, in particular, to write down the cost of new production gear.
“Companies are beginning to step up orders for data storage equipment, operating systems and other aspects of technology,” Reaser said.
“The manufacturing sector should build up strength during the second half of this year.”
FEDERAL RESERVE
Quarter of a point
Members of the Federal Reserve meet Tuesday and Wednesday to discuss monetary policy, with financial markets pricing in a rate cut of not less than 0.25 of a percentage point.
Such a move would take short-term rates to a netherworld level of 1 percent, presumably creating a flood of money that would rev up the economy, perhaps toward levels last seen in the 1990s.
The Fed’s chief concern: a job market that refuses to budge.
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Chicago economist Carl Tannenbaum says policymakers will cut rates by a quarter-point, but will hold off on a half-point reduction.
“Some voices are saying the Fed should do nothing, because the tax cut that takes effect July 1 will cause disposable income to grow twice as fast during this year’s second-half as is the case now,” he said.
However, Tannenbaum, of LaSalle Bank, says members of the central bank heard plenty of rosy predictions at this time last year.
Understandably, they remain on watch.
“There are inklings that business is getting better, that attitudes of executives are growing more positive and that corporate profits are improving,” he said.
“But the Fed will take another step to make policy more accommodating. Policymakers also will toss out a suggestion that if things don’t improve further, there could be another rate cut later this summer.”
GDP
Shaking off a funk
Coming reports include May new- and existing-home sales on Wednesday, and the month’s personal income and spending on Friday. On Thursday, look for a final revision of first-quarter gross domestic product.
Of the group, keep watch on the GDP revision, which will prompt economists to assess how quickly the economy can pull out of its late-spring funk. The preliminary estimate was for an increase of 1.9 percent.
EQUITIES
Not ready to crow
A rally that has carried the stock market skyward since early March has many investors crowing that the bull is back on Wall Street.
Skeptics, however, are not embracing that idea.
Bannockburn-based mutual fund manager Henry Van der Eb says the recent advance, which took 100 days, carried the Dow Jones industrial average 26.1 percent higher.
That’s about the same as the upward move in October and November, which pushed the Dow up by 25.6 percent. But the earlier move took only 50 days.
“There are still plenty of reasons for caution,” said Van der Eb, of the Gabelli Mathers Fund. “We are in the midst of a debt bubble, especially mortgage debt, and any drop in the price of houses would create a serious problem.”
Looking ahead, Wall Street has been anticipating rapid economic expansion, but growth more likely will remain anemic, according to Van der Eb.
“There are warnings that very high prices for natural gas will reduce growth by anywhere from 0.6 percent to more than 2 percent this winter,” he said.
“For now, the economy’s underlying fundamentals remain weak. The situation is likely to disappoint investors.”