Going off script
This is the point in the economic cycle when the industrial sector is expected to behave like something out of an old “Fright Night” movie. As the monster of inflation lurches onto the set, the jury-rigged machinery is supposed to overheat, then self-destruct amid booms and flashes of blinding light. Nothing of the sort, of course, is happening. Chicago economist Erin Fossett says Thursday’s report on August orders for durable goods will show a jump of 1.1 percent, reversing the 0.6 percent decline of a month earlier. But she sees no signs of overheating. “Unit labor costs actually fell in this year’s second quarter, because productivity grew rapidly, even though wages were going up,” said Fossett, of First Chicago NBD Corp. “The pressure continues to be exerted on manufacturers to discount prices.”
Few growing pains
The final revision of second-quarter gross domestic product, due out Friday, is likely to show growth quite near the 3.6 percent annual rate reported earlier. Of greater interest is what is taking place right now. Chicago economist Robert Dederick says third-quarter expansion appears to be running at a 3.2 percent annual rate. “Consumption is quite vigorous, after a second-quarter lull, while business capital spending is nearly explosive,” said Dederick, a consultant to Northern Trust Co. Holding back growth, he says, are a slight downturn in exports and a slower buildup of unsold goods on shelves.
Building the truth
August’s report on existing-home sales, out Thursday, will provide an indicator of whether last week’s report of a 4.8 percent drop in housing starts was a fluke. Chicago economist Samuel Kahan said, “There are several modest indications that construction has been weakening over the last three months.” But Kahan, of A.S.K. Financial Research, said there is scant evidence the housing market has wilted, adding, “The underlying situation remains quite solid.”
Money supply watch
Barely over a week remains before the Federal Open Market Committee gathers to discuss the course of monetary policy, and a majority of economists believe policymakers will hold interest rates steady. Chicago investment analyst Marshall Front says the Fed must be on guard not to overlook an unexpected bulge in the money supply. “As of Sept. 1, the year-over-year growth of M3, a broad monetary measure, has hit a rate of 9 percent,” said Front, of Trees Front Associates Inc. “Such expansion of the money supply clearly is excessive, and may help explain the inflation that has occurred in both the price of houses and the stock market. This is a significant problem for the Fed.”
On pins and needles
With October on investors’ minds and an outpouring of corporate profits due in less than three weeks, Wall Street is growing antsy about third-quarter results. Chicago investment adviser Rao Chalasani says investors cannot afford to be complacent about the outlook. “Earnings growth is decelerating for many large-capitalization stocks,” said Chalasani, of Everen Securities Inc. “Profit margin stagnation is also occurring, with selected stocks showing deterioration.” In his latest letter, Chalasani tells investors to “focus on specific sectors and stocks, not the market averages.”
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