The following review of economic trends reflects conditions as of October 6, 2003.

The U.S. economy may finally have received the long-awaited news that the labor situation is improving. The Labor Department announced in early October that nonfarm payrolls increased for the first time since January. The unemployment rate held steady at 6.1 percent and the four-week moving average of initial claims for unemployment insurance remained below 400,000, the figure generally considered to be a threshold for stability on the labor front. While unemployment duration is generally considered a lagging indicator of an economic recovery (that is, unemployment tends to decline after a recovery has begun rather than before), the length of this duration and the possibility of a “jobless recovery” has caused concern. Economists are now keen to see if this momentum can be sustained. Both Ford and DaimlerChrysler are reportedly set to eliminate thousands of positions. In a parallel announcement, The Conference Board released results of a survey indicating that the percentage of consumers who plan to buy a new car in the next six months has fallen to its lowest level since 1974.

Consumers are providing mixed signals regarding the direction in which their behavior may push the economic engine. In September, the Conference Board’s Consumer Confidence Index, which had risen in August, fell back to July levels. This was attributed to pessimism regarding jobs availability. Yet, the Commerce Department reported strong increases in consumer spending in both July and August. A sustained increase through September would represent the largest quarterly spending increase since 1985. Data on September consumer spending will be released later in October. The Conference Board’s research indicated that consumer spending is expected to continue at or near current levels. If this is borne out, the employment picture may brighten over the coming months as employers bring on new workers for the holiday season.

The manufacturing sector reported moderately good news, according to the Institute for Supply Management (ISM). The ISM’s index of 53.7 remains above the threshold of 50.0, which indicates that most manufacturers surveyed believe that business is getting better or holding steady. Thirteen of 20 industries surveyed reported growth in September. Capacity utilization, however, remains very low at 75 percent. The absence of pent-up demand on the part of both businesses and consumers means that it may still be a while before this situation improves.

The Conference Board also announced that its leading index of economic indicators increased in August (the most recent month measured) and continues to bolster a trend that began in the spring of this year. The coincident index was unchanged in August, but remains above its low point in April. The lagging index also did not move in August, after a small increase in July. (Leading indicators tend to precede a recovery, coincident indicators tend to occur simultaneously with a recovery, and lagging indicators tend to follow a recovery.)

Inflation shows little sign of becoming a concern. The Consumer Price Index rose 0.3 percent in August. This figure is reduced to 0.1 percent if volatile energy and food prices are excluded.

The housing market has eased off its torrid pace, although still remaining strong. Construction of new houses slipped about 4 percent in August from a 17-year high in July.

There are plenty of obstacles lurking ahead. OPEC announced a production cut that will take effect in November. Consumers, who were forced this summer to pay some of the highest gasoline prices ever seen in this country to fuel their cars, may now have to dig deeper to heat their houses this winter. The recovery may be hampered if money that would have gone for discretionary spending has to instead be diverted to pay for fuel.

Although stocks suffered through a minor swoon in September, they still came through with positive results for the third quarter. As of this writing, all the major indices remain ahead for 2003 by double digits. Small-cap and mid-cap stocks outpaced large-cap stocks during the quarter. Among stock sectors, Information Technology was the big winner in the third quarter. Materials, Industrials and Financials also did well. Telecom had an awful quarter and is the only sector showing negative performance for 2003 at this time. Health Care and Utilities were also down for the quarter.

Source: The Wall Street Journal

Treasury bond prices fell when the president of the Dallas Federal Reserve stated that economic growth should accelerate, which would make further interest rate cuts by the Fed unlikely. This would be a detriment to bonds, which saw their yields rise as prices fell.

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The above article is for general information only and is not intended to provide specific advice or recommendations for any individual. Consult your attorney, accountant, or financial or tax advisor with regard to your individual situation.

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