Posted on: Monday, April 5, 2004

Service-sector report expected to show increase

By William Sluis
Chicago Tribune

Those who insist the Federal Reserve will be forced to raise interest rates later this year point to a squeeze on raw materials, with steel prices soaring, some types of food in short supply and the cost of gold leaping to levels not seen in years.

Production lines in many factories have begun to rev up. But one area still has plenty of unused capacity: employment.

Despite an increase in hiring last month, many workers are running scared, and many millions still are looking for a job.

That brings us to today's March service-sector report from the Institute for Supply Management. On Thursday, the group's measure of manufacturing for March rose to 62.5 from 61.4 a month earlier, well above the consensus.

Economist Lynn Reaser is looking for the service-sector measure to show a nice jump as well, to about 62 from 60.8 in February.

"There is a lot of feedback between manufacturers and the nonmanufacturing sector," Reaser said. "For instance, when a factory increases output, it creates a lot of work for companies involved in transportation and related services."

Because all aspects of the economy are picking up momentum, Reaser, of Banc of America Capital Markets in St. Louis, believes the job market has further room to improve.

"Employers can only stretch workers so far, and there is a limit to how much can be achieved in the name of productivity," she said. "By next year at this time, we will no longer call this a jobless economic recovery."

Two indirect measures of the jobs situation will be announced this week, with reports Wednesday on February consumer credit and Thursday on March sales at discount and department stores.

The strong pace of buying in recent months suggests people aren't having as tough a time finding work as the official numbers indicated.

In February, personal income was up 4.6 percent on a year-over-year basis, hardly the stuff of unemployment compensation. Tax refunds are running well ahead of last year's.

Early indications are that Americans slowed their pace of borrowing through the winter, while March store sales have shown plenty of firepower.

Merchants report the weather was sufficiently nice to spur sales of lawnmowers and garden furniture, but cold enough to allow them to clear out stocks of winter apparel.

Inflation numbers will be in the spotlight Thursday, when the Labor Department is scheduled to release March numbers for the producer price index.

The February report was delayed by computer glitches and showed only a 0.1 percent rise, even though food and oil prices rose twice as fast. Other prices that ascended quickly included cars, tires and liquor.

Economist Ian Shepherdson says inflationary pressures are building, and the index is set to rise much more rapidly.

"Prices up the supply pipeline continue to surge," said Shepherdson, of High Frequency Economics, Valhalla, N.Y. "Core raw materials prices rose a massive 5.5 percent in February and are now up 26.2 percent, year-over-year."

He says wholesale inflation will be advancing at a 2 percent to 3 percent pace before the end of the year. That will boost prices for consumers, Shepherdson added, but at a lesser rate of perhaps 0.8 percent.

The stock market usually faces the middle part of the year with trepidation. The next six months historically show few gains, compared with rip-snorting results in the other half of the year.

For now, investors are awaiting first-quarter profit reports, which are expected to show double-digit improvements.

Chicago investment manager Marshall Front says a unique seasonal factor is at work, one that favors those who act quickly.

"Over the last 50 years, the first seven sessions of April showed gains for stocks 67 percent of the time, with an average gain of 0.8 percent," said Front, of Front Barnett Associates.

That rapid upsurge was more than twice the typical advance for a similar, random period of 0.35 percent, he said.

Meanwhile, Wall Street faces a shortened week, as stock, bond and commodity markets will close for Good Friday.