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Economy Rolls, Auto Sales Stall

Early indications show that the economy continued to fire on all cylinders in April. While the ISM manufacturing survey fell 0.1 points to 62.4 from March and was 0.3 points below economists' estimates, it was the sixth consecutive month above 60 and every industry included in the survey reported growth. Production gained 1.5 points to 67 as new orders decreased slightly to 65. Backlog jumped to the highest level since the component was tracked starting in 1993, it rose 3 points to 66.5. Supplier deliveries finally backed off after rising for six consecutive months, but remain at very elevated levels, 67.1. While manufacturers have reported slow delivery times, they have also reported shrinking inventory levels. In fact, low inventory levels remain one of the mysteries of this recovery, especially since there have been reports of production lines shutting down due to a lack of supplies. Prices paid rose 2 points to 88, which is the highest level since November 1979. Employment rose 0.8 points to 57.8 signaling increasing employment for the sixth straight month. Norbert J. Ore, C.P.M., chair of the Institute for Supply Management, summed up the report by stating, "The second quarter is off to a very strong start. Many respondents indicate that order backlogs are growing for the first time in several years. The list of metals up in price is quite extensive - almost every category of product has seen price movement."

The non-manufacturing ISM survey was even more robust. It increased 2.6 points to 68.4 and is the highest level since it started in 1997. Prices paid jumped another 2.9 points on top of last month's 8.4 point increase. The prices paid component is at 68.6, just one point shy of the high set in March 2000. New orders rose 2.8 points, only 0.1 points from the high set last August. Backorders turned up, advancing one point, after three months of decline. Supplier deliveries surged 3.0 points to 58, this is the highest level since August 1997 when it surged to 71.5. Employment increased 0.6 points to the highest level since November 2000.

Further evidence of economic strength was found in the 4.3% increase in factory orders. This was close to twice the 2.4% growth economists forecasted for April and was the fastest growth in factory orders since July 2002. Additionally, the report noted that inventories are at a record low, 1.23 months. On a year-over-year basis, orders increased by 10.8%, the fastest growth since June 2000.

This week, Bloomberg published a story that discussed several different companies' ability to pass along price increases. Caterpillar instituted a 1.5% increase in January and plans to implement a 2% to 3% increase in July. James W. Owens, Caterpillar's CEO, was quoted saying, "We anticipate that keeping pace with volume growth will require additional hiring through the remainder of the year." Thor Industries will increase prices by 3% this year after years of holding price increases to 1% or less. Owens-Illinois was able to pass along resin price increases to its customers. Georgia-Pacific will raise prices by 6% to 9% on July 1 for its paper products. Much of these increases are simply to pass along higher prices that companies had to pay for raw materials. The Goldman Sachs Commodity Index has increased 4.7% just this week and is up 16.4% this year and 79.2% since the end of 2001. Good thing there is no inflation or this index would really look like a dot-com in 1999.

Retailers will be reporting April sales on Thursday and the International Council of Shopping Centers forecasts that same store sales rose 5% in April. While this would be well below the 7% reported last month, it is above the 3.1% increase last April. Interestingly, even as retail sales have been strong, retail stocks have traded sidewise for the past two quarters. The S&P 500 Retail index has only advanced 2.5% since the end of October compared to 7% from the S&P 500. Investors clearly are starting to have doubts about the longevity of the US consumer.

A few retailers reported April same store sales on Wednesday, which were on average better than analysts' forecasted.

Retailer April Same Store Sales Estimate
Aeropostale 19.3% 9.0%
American Eagle 7.1% 5.0%
Hott Topic 0.7% 3.4%
Men's Warehouse 10.4% 5.3%
West Marine 7.6% N/A

It is interesting to note that Wal-Mart reported that its same store sales were running at the low end of their plan, an increase of 4% to 6%, during the middle of April. Previously, Wal-Mart had been hitting the top end of their plan. It is quite possible that Wal-Mart will under perform the group as spending by lower income consumers is constrained due to higher fuel cost and other inflationary forces.

While it appears consumers were active at retail stores, their pace of buying vehicles were slower than expected. Vehicles sold at a 16.4 million unit pace in April, which was lower than the 17 million rate analysts expected and the 16.7 million units last month. GM's sales increased by 0.2%, all of which came from increased truck sales that were aided by its Truckfest promotion. During Truckfest GM offered $1,000 in incentives along with zero-percent financing. These offers increased the incentives GM offered on trucks by 1.2% from March and likely crimped Ford's sales, which were down 4.1%.

Incentives remain the bane of automakers. Every opportunity they take to try and wean consumers off incentives, consumers react by slowing purchases. GM only managed to increase sales by increasing incentives. Ford attempted to pare back incentives and it lost sales. Ford has already increased its incentives on its SUVs and minivan by offering a $1,000 rebate on zero-percent financing for 60-months. It appears that all the rhetoric about sacrificing market share to restore profitability was only rhetoric. The domestic automakers have such large fixed costs that they are almost better off building as many cars as possible and selling them for close to cost than slowing down the manufacturing line which would spread the fixed cost over fewer cars.

While the domestic automakers reported lackluster sales, several foreign manufacturers reported strong sales. Porsche sales were up 13% on the strength of its SUV, Nissan increased sales by 14.0% and BMW reported its strongest month ever, eclipsing last April's sales by 11%. The foreign automakers have continued to win market share. April marked the fourth consecutive month where the big three were less than 60% of the market. This is the longest stretch ever where the domestics held less than 60% of the market.

Additionally, most of GM's sales were driven by fleet sales, which rose 30%. Retail sales fell 8%. The slower sales pushed inventory levels up to 85 days, about 18% higher than last month. Fleet sales also helped Ford. Fleet sales rose 9% while retail sales fell 9%. Ford's inventories also increased substantially, up to 87 day. This is about 20% higher than average inventory levels. With inventories high at most automakers, the next couple months might be a good time to "hold hands and buy a SUV," to borrow a line from our hometown central banker, Bob McTeer.

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