Services, Factory Orders Brighten Outlook

Wed Aug 4, 2004
By Alister Bull

WASHINGTON (Reuters) - Hope for the U.S. expansion got a boost on Wednesday as a batch of buoyant numbers signaled the economy's recent soft spot may prove short-lived and pointed to more interest rate hikes by the Federal Reserve.

The Commerce Department said factory orders advanced 0.7 percent in June, after a revised 0.4 percent gain in May that was initially reported as a 0.3 percent fall. Economists had expected orders to rise 0.5 percent.

The data were more upbeat than many June numbers and dovetailed with an Institute for Supply Management poll on Monday showing U.S. factories picked up their pace in July.

A separate ISM report on Wednesday showed that strength spilled into the service sector, which accounts for 80 percent of the U.S. economy. The ISM non-manufacturing index rose to 64.8 in July from 59.9 in June. Wall Street had expected a weaker 61.0 reading.

"Both numbers suggest that there's still strength in the economy," said Gary Thayer, chief economist at A.G. Edwards & Sons in St Louis, Missouri.

"June factory orders were up for the second consecutive month, suggesting that the slower growth we saw in the second quarter may be temporary. The ISM non-manufacturing index shows that the service side of the economy continues to expand at a very robust pace," he said.

One disappointing aspect of the ISM survey was a decline in its employment component to 50.0 from 57.4, a worrying sign on the heels of a Tuesday report from outplacement specialist Challenger, Gray and Christmas Inc. showing that companies are still cutting payrolls.

Jobs growth is seen as the linchpin of the expansion and financial markets will pay close attention to the July employment report, due on Friday, which is forecast to show the economy created 228,000 new jobs after a disappointing 112,000 in June.

The dollar weakened against the euro after initially firming on the strong ISM report. Prices on the U.S. government's 10-year Treasury note rose to 102-21/32 (US10YT=RR: Quote, Profile, Research) from 102-15/32, sending the yield down 4 basis points to 4.41 percent.

FED WATCH

The reports taken together were good news after a gloomy readout on Tuesday showing U.S. consumer spending dived in June, sparking fears that growth could falter unless job creation gives incomes and consumers a lift.

Spending fell 0.7 percent in June after rising 1.0 percent in May, although an advance in July vehicle sales from domestic automakers signaled the consumption pull-back may not have been a lasting one.
"It provides us with further corroboration of (Fed Chairman Alan) Greenspan's view that the soft patch of the economy is transitory," said Michael Woolfolk, senior currency strategist at the Bank of New York.

Greenspan's stance has underpinned predictions the Fed will raise rates steadily this year, including an expected quarter-point hike at its next policy meeting on Aug. 10 to 1.50 percent, which would match an increase in June.

"The overarching question is: we had a lot of weak numbers in June, an unexpected slowdown in GDP (gross domestic product) in the second quarter -- does it all just boil down to maybe one bad month driven by high oil prices?" asked Bill Cheney, chief economist at John Hancock Financial Services in Boston.

"Increasingly, I think that is what it looks like. But we probably won't have any real clarity until we get the employment report on Friday," he said.

Oil prices again soared to record levels on Wednesday on supply concerns and strong demand.

FACTORIES ROLL

The Commerce Department said orders for durable goods -- big-ticket items meant to last three years or more -- rose a revised 0.9 percent. They were initially reported as up a smaller 0.7 percent.

Non-durable goods, which make up just under half of all factory orders, were up 0.5 percent after a revised 2.0 percent climb in May, a gain previously reported as 1.5 percent.

Stripping out transportation cut the June factory orders advance to 0.1 percent.

Factory inventories grew 0.7 percent in June and total durable goods inventories rose 0.9 percent, the biggest rise since December 1999.

The inventories-to-shipments ratio, an indication of how fast inventories would deplete at the current pace of shipments, was unchanged at 1.23 months.

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