U.S. economic analysis – week of August 1, 2005

U.S. economic analysis – week of August 1, 2005

A report released early this week shows that construction spending fell while mortgage applications declined. There are signs that the U.S. housing market may be finally cooling off. The Commerce Department said construction outlays fell to a seasonally adjusted annual rate of $1.093 trillion. That was down from a revised May figure of $1.096 trillion. Since February, construction spending has fallen over three percent. The Mortgage Bankers Association announced that new mortgage applications fell 0.3 percent last week to 752.1. The previous week it fell 5.8 percent. Refinancing applications also dipped, falling three percent to 2250.3 after dropping 11.4 percent the week before. Interest rates on mortgages also took a big hit, jumping 0.11 percent to 5.32 percent. It was the biggest one-week increase since March. Meanwhile, oil streaked to a record high of $62.30, on news of Saudi Arabia’s King Fahd’s death, before declining $61.57 which was still a record over the previous high mark. King Fahd passed away on Monday and will be succeeded by Crown Prince Abdullah. Saudi sources have moved to soothe market tensions by ensuring that the regime will keep the world’s market well supplied. However, analysts are skeptical about the long term stability noting that the Crown Prince is in his 80s. There are also concerns that the U.S. may not be able to meet its supply demands due to refinery problems. Two major U.S. refineries have been recently forced to shut down which has caused fluctuations in the market. Nor have things been helped by Iran’s decision to restart its nuclear program. Iran is OPEC’s second largest supplier and its decision, which is in defiance to EU warnings, could lead to UN sanctions. On the bright side, the Commerce Department reported that consumer spending advanced a brisk 0.8 percent in June. Income increased 0.5 percent while inflation held steady which defied economist’s expectations that non-volatile items (excluding energy and food) would inflate 0.1 percent. The strong consumer spending represented a drastic turnaround from the weak numbers posted in May and promised to close out the second quarter on a high note. It was also reported that new orders at U.S. factories increased one percent in June. The gain equaled Wall Street predictions. As a result, durable good orders were upwardly revised to a two percent gain in June. Computers and electronics orders jumped 10.8 percent while machinery was up four percent. Rounding out the news was data released today that said unemployment remains steady at 5 percent and employers added 207’000 new jobs to their payrolls in July. In an earlier report this week issued by the Labor Department, jobless claims fell by 1’000 during the previous week. The Labor Department said the drop was due to the automobile industry and other manufacturing sectors issuing fewer layoffs. The numbers seem to indicate that the labor market is finally on the mend. In stock news, it was a great week for steel shares as investment firm Morgan Stanley upgraded the sector from in-line to cautious. As a result, steel shares saw a large boost across the board. Shortly after the announcement Mittal Steel rose 2.7 percent, U.S. Steel 3.8 percent, Steel Dynamics gained 5.6 percent, and AK Steel was up 4.2 percent. Oregon Steel also rose 3 percent and Nucor, which was upgraded from Overweight to Equal Weight, jumped 5 percent. Overall, it has been a relatively volatile week on Wall Street. After a relatively strong start during the first three days, Thursday checked in with large drops across all the major indices and that trend has continued through Friday morning. Investors are widely fearful that a stronger economy along with higher earnings may be leading towards rising inflation and spiking interest rates. It remains to be seen what exactly will happen. The Federal Reserve is widely expected to raise interest rates another quarter point when they meet next week. It would be the 10th straight time the Fed has raised interest rates. After that, investors are cautiously optimistic they will take a break.