Posted on: Sunday, August 29, 2004

Bumps in recovery troubling

By William Sluis
Chicago Tribune

The high-octane price of gasoline has provided a one-size-fits-all punching bag for those anointed to explain a recent soft patch in the economy.

Are sales at auto dealerships weak? Blame fuel costs that restrict buyers to their driveways. Are family purchases of school supplies disappointing? It's because households can't afford to get to the Wal-Mart.

What haunts the experts at this point is whether gasoline costing the typical driver about 5 cents a mile is enough to hobble the economic expansion.

Next under the microscope is the job market, which has faltered in the summer after flourishing in the spring. Evidence on that score rolls in Friday with the August employment report.

Economist Brian Wesbury is looking for it to show a solid gain of 220,000 new jobs, far better than the 32,000 in July. He sees unemployment holding steady at 5.5 percent, though it could dip to 5.4 percent.

"The last two reports were something of an aberration, because the economy is stronger than recent employment figures have shown," said Wesbury, of the investment firm Griffin, Kubik, Stephens & Thompson.

He said surveys of households have shown the job market making bigger strides than the statistics provided by employers.

In the months ahead, "all in all, the numbers will improve," Wesbury said. "The expansion is on track for the Federal Reserve to take a further step to raise interest rates Sept. 21."

A fresh reading on August consumer confidence from the Conference Board, due out Tuesday, should show a modest rise from the solid 106.1 reading a month earlier, according to economist Mark Vitner, who said attitude surveys keep coming in at better-than-expected levels, though consumers have a lot of things on their minds.

"For one thing, there has been a slight pullback in the price of gasoline. Also, there is a very uplifting mood associated with the Olympics," said Vitner, of Wachovia Securities in Charlotte, N.C.

On the downside, he watches for the survey's indicator of consumers saying jobs are hard to get. Vitner says that measure shows not all Americans are ready to jump on board the bandwagon to happier days ahead.

After many months in the doldrums, the manufacturing sector has revived, becoming in many ways the economy's strongest pillar. Factories have even done a bit of hiring.

The August purchasing managers survey Wednesday from the Institute for Supply Management was at 62 in July, suggesting production lines are humming. A slight pullback to about 60 is expected in the new survey.

Economist Ian Shepherdson said: "The rate of orders growth has slowed over the last few months, but there is nothing at all to suggest than an extended stagnation is now in the cards."

Shepherdson, of High Frequency Economics, Valhalla, N.Y., said "unless corporate confidence declines sharply in the face of weaker consumer spending, there is every reason to expect orders to gather renewed momentum."

With little or no summer rally to prompt chortling among investors, the stock market enters its final week before Labor Day with very low volumes and equally low expectations.

Once traders return from their late August vacations, Wall Street may find a fresh breeze at its back.

Flossmoor, Ill.-based investment adviser Richard Evans said investors have been flummoxed by the lack of significant gains.

He said one client called him and said, "I've got an expensive wedding coming up in a couple of months. When is the market going to go up by 20 percent so I can pay for it?"

Evans said there are few signs the bull market will extend that far that quickly. But he adds that "no matter who wins the elections, earnings momentum will continue. Stock prices are headed higher."