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Debate Over June Data Going Strong


There will be more than a passing interest in the July economic indicators when they start to dribble out from the U.S. statistical mills and trade groups in the next two weeks.

If the weak June data -- everything from employment to industrial production to retail sales to durable goods orders to housing starts -- were either artificially depressed or a normal blip in a solid trend, then July's numbers will rebound smartly. If they don't, the second-half-slowdown theory will gain more credence, and expectations for official rate increases will be scaled back.

Economists at Action Economics LLC in Boulder, Colorado, think the June slowdown is a "head-fake."

"An unusual confluence of events had a severely adverse impact on a wide swath of U.S. economic releases for June," writes Rick MacDonald, director of research and analysis at Action Economics. "Weakness in a laundry list of releases can be attributed to a similar laundry list of temporary factors."

MacDonald cites calendar effects -- Memorial Day fell on the last possible day of the month while the June employment survey took place during the earliest week possible -- as potentially problematic for the seasonal-adjustment process.

TV Effect

Then there was an unexpected national holiday on June 11 for former President Ronald Reagan's funeral. Many companies were closed that day, something the seasonal factors don't take into account.

The Bureau of Labor Statistics told me on July 2, the day the June employment report was released, that they could find no evidence of an effect in the data. There still could have been some "TV effect," MacDonald says, noticeable when events that capture the public's attention keep Americans tuned in rather than shopping 'til they drop.

Cool and wet weather in some portions of the country depressed utility output and maybe housing, MacDonald says. And "auto sales may have been hurt by price increases, as automakers attempted to boost profit margins," he says.

The June producer price index showed cars and trucks up about 1 percent in May and June, resulting in the largest year- over-year increase in wholesale prices of new vehicles in the last decade, MacDonald says.

Newton's Law

Because July is typically the second-weakest month of job growth all year -- something the seasonals anticipate -- Action Economics has "aggressive July estimates for all of the data that disappointed in June" and a forecast for 4 percent real GDP growth in the second half, MacDonald says.

"You'd really need a spectacular story to have a break in the trend," he says.

The economy has at least one thing in common with natural science. A body in motion remains in motion unless it is acted upon by a countervailing force (Newton's first law of motion).

Where is that force? The federal funds rate is well below the inflation rate, regardless of which price measure you use. Even if Federal Reserve Chairman Alan Greenspan delivers on his intention to normalize rates in measured steps, monetary policy won't begin to bite this year.

That's not the view of the Economic Cycle Research Institute, which says a slowdown is "baked in the cake."

Proprietary Warning

Based on readings from its proprietary leading indexes for employment, manufacturing, services, construction and the overall economy, the ECRI says the U.S. economy is "on the cusp of a slowdown that will persist at least through year-end."

They aren't forecasting a recession; just a slowdown to trend growth, something on the order of 3 percent. The economy grew 3.9 percent in the first quarter following 6 percent second- half growth. Economists surveyed by Bloomberg News expect second- quarter real GDP growth of 3.7 percent. The Commerce Department will provide its first pass on the second quarter next Friday.

The stock market is siding with the ECRI outlook for less robust growth, or at least less robust profit growth, ahead. The Dow Jones Industrial Average, the Standard & Poor's 500 Index and the Nasdaq Composite Index are all posting year-to-date losses.

The ECRI's forecast for a broad-based slowdown in growth is based on the growth rate of its long-leading index, "our frontline forecasting tool," which peaked in June 2003, says Lakshman Achuthan, managing director of the ECRI. The index leads cyclical turns on average by a year, he says.

July Preview

Given my distrust of econometric models, I wanted to see for myself how the long-leading index did in the last cycle. The last peak came in August 1997, well before the economy's rate of growth peaked in the fourth quarter of 1999. On a year-over-year basis, real GDP growth peaked at 4.8 percent in the second quarter of 2000.

Achuthan encouraged me to look at the relationship between the growth rates of the ECRI's proprietary long-leading index and its proprietary coincident index. Here's a shocker: The peak in the former anticipated the peak in the latter in 1998.

The high-frequency July data give reason to hope June was a blip, or "soft-patch," in the trend. Continuing claims for unemployment benefits fell to their lowest level in the week ended July 9 in more than three years, but may be distorted by auto-plant shutdowns.

Industrial activity seems to be accelerating. Michael Lewis, president of Free Market Inc., a Chicago-based economic consulting firm, tracks rail freight carload traffic as a timely read on goods shipments. His index of rail traffic excluding grain and coal, which "are less economically sensitive," plus intermodal volume posted the biggest year-over-year gain in a decade this month, Lewis says.

'Patience'

The employment index of the Philadelphia Federal Reserve's July business barometer hit an all-time high. Diffusion indexes don't tell us anything about the number of people hired; just that more companies hired in July compared with the previous month than at any time in the survey's 36-year history.

All expansions hit soft spots. Because the current one was so long in gaining critical mass, plagued as it was by shocks, stocks and scandals, the degree of confidence in the economy is lower than usual given the fundamentals.

One month of weak data does not warrant renewed pessimism. Perhaps a little patience is in order.