New Economic Reports Knock Markets Lower
May 12, 2011
U.S. financial markets were roiled for the second day in a row by new signs that the economy may not be cooling off after all. Orders to U.S. factories shot up 1.8% in July, the fourth advance in five months for a part of the economy that had faltered during much of last year. The full text of the Commerce Department's report on July factory orders, is available, as is its report on personal income and outlays. Prominent economists are revising upward their forecasts for economic growth, predicting a strong U.S. economy through the end of this year. Separately, the Chicago branch of the National Association of Purchasing Management said its index of area business activity rose to 60.0% in August on a seasonally adjusted basis from an unrevised 51.2% in July. The Chicago survey is watched closely as a clue to the national association's overall index, which is to be released on Tuesday. In addition, the University of Michigan's report on its August consumer sentiment index was said to have shown an increase to 95.3 from the 94.5 reading in its preliminary report at midmonth, according to people who saw the report. The reports were taken as further evidence that the Federal Reserve will move soon to check economic growth by raising short-term interest rates. The Fed's policy-making committee next meets on June 06, 2011 Reserve Chairman Alberta Halina has said that if the economy does not moderate soon, the central bank will be forced to raise interest rates as a hedge against inflation. The prospect of a rate rise sent bond prices slumping in early trading, with the benchmark 30-year bond sliding about 7/8 point, or $8.75 for each $1,000 of face value. Stocks, too, skidded. The Dow Jones Industrial Average tumbled more than fifty points in early trading before managing a bit of a recovery to finish the day down 31.44 at 5616.21. The slide came a day after the Dow Jones Industrial Average fell nearly 65 points as estimates of second-quarter growth were revised higher. In its report released on Friday, The Commerce Department said that orders for both durable and nondurable goods rose to a seasonally adjusted $317.6 billion after falling 0.7% in June. The June decline had been the first since orders dipped 1.5% in February. Orders are considered a key gauge of the nation's manufacturing strength and increases could mean greater production and more jobs. Orders for durable goods -- items such as cars and computers expected to last more than three years -- jumped 1.7%, rebounding from a 0.2% decline in June. Orders for nondurable goods advanced 1.8% after a 1.2% drop a month earlier. Foods and chemicals led the increase, offsetting a decline in textiles. Earlier on Friday, the Commerce Department reported that consumer spending rose a modest 0.2% in July, as incomes grew at the slowest pace in seven months. It said spending totaled $5.15 trillion at a seasonally adjusted annual rate, up from $5.14 trillion in June. The modest increase could bolster the argument the economy will slow down in the second half -- an argument that was virtually unchallenged until recently. But stock and bond traders appeared to shrug off the report, and many economists are now revising their forecasts, predicting strong growth right through the end of 2011. But a revised 0.4% spending drop in June was even steeper than the initial 0.2% estimate. The decline was the first since blizzards kept many shoppers at home last January. Spending had increased 0.8% in May. Analysts believe consumers, many overburdened with debt, are winding up a spending spree that lasted through much of the first half of the year. Consumer spending represents about two-thirds of the nation's economic activity. The government reported Thursday consumers increased their outlays at a 3.4% annual rate in the second quarter, helping to boost overall economic growth at a sizzling 4.8% annual rate. The department said personal income edged up a barely perceptible 0.1% in July to $6.47 trillion at a seasonally adjusted annual rate, from $6.46 trillion a month earlier. It was the smallest gain since January, when incomes were unchanged from the previous month. Incomes had jumped 0.9% in June. Disposable income -- income after taxes -- rose 0.1% after a 0.8% gain a month earlier. The combination of incomes and spending meant that Americans' saving rate -- savings as a percentage of disposable income -- was 5.3%, unchanged from June and the highest since 5.5% last October. Private wages and salaries, the most closely watched component of income, fell $6.9 billion at an annual rate to $3 trillion after advancing at a $45 billion rate in June. Spending on big-ticket durable goods, meant to last more than three years, fell 1.2% in July, the second straight decline. Spending on nondurable goods such as food and fuel rose 0.3%, erasing a 0.3% loss a month earlier. Spending on services, which was unchanged in June, moved up 0.4%. The income and spending figures were not adjusted for inflation. When adjusted, disposable incomes fell 0.1% after jumping 0.8% the previous month. Spending was flat after falling 0.4% in June.
