Economic Update-Wanel Angel,Phillips Curve and other stuff.
(Courtesey:Bear Stearns)
ed:
Don't you fret about the dimwits at Merrill Lynch,their anemic GDP growth prediction for 1999 seems ill-conceived at best and way off the mark at worst.Man where do they come up with these numbers???? I rather listen to Wane Angel than the dismal scientists at ML,at least he used to be part of the show over at FOMC and should have a better understanding of these matters.
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Strength Continues Wayne Angell
February 8, 1999 John Ryding
Melanie Hardy
Danielle McElley
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The data thus far suggest that the economy did not miss a beat last month. Nonfarm payrolls rose 245,000 in January, almost exactly in line with the pace of job creation in the fourth quarter, while the National Association of Purchasing Managers reported a stronger-than-expected gain in its overall activity index. These data support our view that the economy is likely to grow at a 3% pace in the first quarter. At its two-day meeting last week, the Fed — as expected — chose to leave interest rates unchanged. Furthermore, a change in the FOMC's announcement procedures suggests that its lack of an announcement following the end of its February meeting points to the Fed maintaining a neutral stance in its directive on interest rates. We believe that worries that the Fed is likely to shift to a tightening bias are misplaced, and we think that the chances are very low that the Fed will raise interest rates this year.
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Robust Job Growth Contrary to expectations of a weather-related slowdown in job creation in January, nonfarm payrolls rose 245,000 in January. The three-month average pace of job creation firmed to 273,000, which was the strongest three-month gain since June 1998 and well ahead of its 12-month growth rate of 226,000. While the private workweek slipped 0.1 hours in January, total hours worked stood 1.2% ahead of its fourth-quarter average (at an annual rate) and 1.1% ahead of January 1998. Allowing for productivity gains, this gain in total hours worked points to around 3% real GDP growth in the first quarter. Employment gains were broad-based again in January, as 56.9% of private industries added to jobs — the strongest reading on this job diffusion indicator in seven months. The weekly unemployment claims data for the last two weeks of January also point to a continuation of robust job growth.
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Manufacturing Improvement The payroll survey also suggested that manufacturing continues to improve, as U.S. manufacturing industries shed only 13,000 jobs in January, following a decline of 16,000 in December. Job losses appear to have moderated in the manufacturing sector in the last two months since, over the six months ended November 1998, manufacturing employment averaged a 39,000 decline per month. The NAPM activity index for January was the strongest reading since June 1998, rising to 49.5 on broad-based gains in its components. Another sign of improved manufacturing activity was afforded by the December factory orders report. Total factory orders posted their strongest one-month gain since November 1997, pushed higher by a 3.1% increase in durable goods orders. Particularly robust within durable goods orders were capital goods and computers. Orders of nondefense capital goods (excluding aircraft) rose 7.4%, which was the largest one-month gain since September 1997, while orders of computers and office equipment increased by 5.7%. During the last three months of 1998, orders for computers and office equipment rose at an annualized rate of 28.6%, which represented an acceleration from its already strong 12-month increase of 20.5%.
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Phillips Curve Angst The unemployment rate held at a 29-year low of 4.3% in January. Average hourly earnings growth moved higher for the second-consecutive month, as a 0.5% increase in earnings in January pushed the 12-month increase to 4.0%. Nevertheless, hourly earnings growth remains well below its 12-month peak of 4.4% recorded in April 1998. Phillips Curve concerns of higher inflation might be stirred somewhat by the latest employment report, but gold prices point to no pickup in inflation pressures, and we expect inflation to remain low in 1999.
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Manufacturing Improvement Nevertheless, the equity market appeared frightened by the strength of economic activity, although we believe that this fear is unfounded. We reported last week that Fed Chairman Alan Greenspan distanced himself from the Phillips Curve model of inflation in testimony before the Senate Budget Committee. In the latest week, we learned that the Fed probably did not switch to a tightening bias in its policy directive at the February FOMC meeting. At its December meeting, the FOMC decided that it would "on an infrequent basis" release a statement following the conclusion of the meeting when interest rates were left unchanged when the FOMC "wanted to communicate to the public a major shift in its views about the balance of risks or the likely direction of future policy." Since the Fed made no such announcement following the latest FOMC, we can infer that the members of the Committee did not see a major change in the balance of risks facing the economy and stayed with a neutral directive. We do not expect the Fed to raise interest rates in 1999 and we believe that the good news on economic growth will ultimately prove to be good news for equity investors. As for the bond market, we expect long Treasury yields to remain in a narrow range of 5%-51/2% in 1999, and expect that yields will move lower once the quarterly refunding is out of the way.
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