The future's so bright

[Sabri Oncu <soncu@xxxxxxxxxxx>]

You thought I was joking, right?

Sabri

++++++++++++++++++

The future's so bright ...

You may not need shades just yet, but the economy is starting to
look sunny.
June 3, 2002: 5:27 PM EDT

By Kathleen Hays, CNN/Money Contributing Columnist

Manufacturing rebound continues! Residential construction hits
record high in April! Commercial building rises for the first
time since January! Home prices jumped 6 percent in the first
quarter, from a year earlier.

Why all the exclamation points? Because if you're just watching
the stock market, you might think the economy was still looking
pretty dismal. Let's make it clear: The economy is in recovery.
That's the message from Monday's reports, and more good news
probably lies ahead.

Today we again see that one of the four indicators used to date
the business cycle -- the turn from growth to recession, back to
growth again -- is flashing a major green light, and that's the
manufacturing sector. The National Bureau of Economic Research
has four indicators -- employment, industrial production,
personal income and business sales. Manufacturing makes up about
87 percent of industrial output.

The Institute of Supply Management's monthly survey of
manufacturers is one of the most important numbers we get each
month. With May's rise, the group's index has shown growth in
manufacturing for four months in a row, bringing it to its
highest level since February 2000. And new orders are up even
more than the overall business activity index, so all this points
to more gains ahead for manufacturing and the overall economy.

Also very positive: Inventories are too low according to 22
percent of those surveyed, and economists say that means a lot of
companies will have to start rebuilding them, and that means more
orders, output, and maybe even more jobs. According to John
Ryding of Bear Stearns, most of the strength in the latest report
continues to come from sectors related to the consumer like autos
and housing.

Technology is still putting in a mixed performance. There's still
little sign that capital spending is picking up and he says --
like virtually every other economist on Wall Street -- that's
what MUST pick up for the economy to really start firing on all
cylinders. But Ryding is convinced that pickup is just around the
corner.

Worth noting the rise in the Prices Paid component of the ISM
survey to 63 in May from 60 in April. Remember: Any number above
50 means growth, so this signals more companies receiving higher
prices for their output. Once upon a time, we would have worried
about inflation and the Federal Reserve raising interest rates,
but not now. Even Fed Chairman Alan Greenspan thinks companies
need to raise their profits if the economy is to grow again. And
getting some pricing power back for manufacturers is one way of
doing that.

Greenspan has also noted that inflation is low and expectations
for rising inflation low, which gives the Fed time before it
raises rates. Interpretation by many Wall Street economists: The
Fed is willing to tolerate a little more inflation to make sure
the recovery takes hold.

Why this shift from a couple of years ago? As Greenspan has
noted, whatever rise in inflation develops is coming off a very
low base, AND worker productivity appears to be strong enough to
keep unit labor costs low. Maybe even more important is a
perception that if the economy were to falter from here,
de-flation could be just around the corner. When more prices are
rising than falling, profits tend to get crushed, and company
layoffs really go through the roof. Not a pretty picture. Not a
likely scenario in the United States, according to most
economists, but a reality in Japan. That makes it more than a
theoretical abstraction for the Fed.

Speaking of prices going up, the official numbers on single
family homes are in from the Office of Federal Housing Enterprise
Oversight, an independent entity of HUD which watches over the
nation's mortgage lending giants, Fannie Mae and Freddie Mac.
Prices rose 6.05 percent in the first quarter of this year, but
that is actually a less rapid pace than last year. Take a look.
Prices rose 7.4 percent in the fourth quarter, 8.9 percent in the
third quarter, 9.0 percent in the second quarter and 9.3 percent
in the first quarter -- all on a year-over-year basis.

It's more good news for homeowners because it increases their
wealth. And that's good for the economy if it helps keep spending
going at a time when stocks are going nowhere in the aggregate.

When we get to the end of the week, you might not feel the news
is so good because the May employment report is expected to show
only another small gain in new jobs and a small rise in the
unemployment rate. But as long as that helps keep the Fed on the
sidelines, with fingers crossed and hoping for a sustained
recovery, then maybe that's the kind of not-so-good news that
isn't so bad.

Kathleen Hays co-anchors Money & Markets, airing Monday to Friday
on CNNfn, and appears throughout the day reporting on the economy
and how it affects financial markets. As part of CNN's Business
News team, she is also a regular contributor to Lou Dobbs
Moneyline.

Full at:
http://money.cnn.com/2002/06/03/commentary/hays/index.htm