A NON-INFLATIONARY EMPLOYMENT REPORT
NEW ORDERS AND SHIPMENTS DECLINE
CONSUMER SPENDING SLOWS AND SAVINGS RISE
CONSUMER OPTIMISM IS UP
FUTURE INFLATION INDEXES DROP

On Monday I wrote: "It looks like we're in for an exciting week." At the time I was expecting the worst. So were participants in the markets, as the long bond closed down 29/32 for the day and the DJIA lost more than 38 points. With all the important economic news releases coming out in the following four days, it seemed that surely one of those reports would precipitate another inflation panic in the bond and stock markets.

But, it never happened. Report after report revealed a slowdown in the economic surge that drove the second quarter GDP to an annualized increase of 4.2 percent. Report after report showed that price inflation and wage inflation were under control.

Even yesterday, after three straight days of big gains, we still had to get through today's employment report. This report has been a real market mangler in recent months. But, today's report was greeted enthusiatically. By now you know that the 30-year T-bond gained another

1 5/32, driving the yield down to 6.73 percent, and the DJIA advanced again, finishing the day up by a little more than 85 points.

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Today's Labor Department Employment Situation report showed an increase of 193,000 nonfarm jobs during July, right in line with analysts' forecasts. The June new jobs number was revised downward from 239,000 to 220,000. The unemployment rate edged up slightly from 5.3 percent to 5.4 percent. There was further evidence of a slowdown in employment growth in the average workweek statistic. In July that indicator declined by 0.4 hours to 34.3 hours -- just about the same as the level in May. There was no evidence of wage inflation in this month's report. Average hourly earnings decreased by two cents, compared with an increase of nine cents in June.

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In another news release today, the Commerce Department issued its June report on Manufacturers' Shipments, Inventories, and Orders -- also known as Factory Orders.

New orders for manufactured goods in June decreased 0.9 percent. This was the first decline since February. This month, the volatile transportation sector had little impact on orders. Excluding transportation, new orders decreased 0.8 percent, the first decrease since March. Year to date, new orders were 4.3 percent above the same period a year ago. This is down slightly from last month's year to date change of 4.4 percent. On a year-over-year basis, orders gained 4.9 percent. This compares with an annual gain of 7.6 percent last month and is the lowest reading in three months.

Shipments also declined in June, the first setback since March. The 1 percent drop erased a 1 percent rise in May.

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Today the Commerce Department also published its Personal Income and Outlays report for June. Personal income increased $58.4 billion, or 0.9 percent, the largest percentage increase since January 1995. Personal consumption expenditures decreased $8.1 billion, or 0.2 percent. This was the largest percentage decline since January of this year. A drop in spending for auto purchases was a major contributor to the expenditures drop.

What were consumers doing with that extra income that they weren't spending? Well, some of them were saving it. From May to June, personal savings as a percentage of after-tax income jumped from 4.2 percent to 5.1 percent. This was the highest savings rate in the past five months. Maybe they invested some of those savings in the stock market this week.

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The University of Michigan updated its July consumer sentiment number today, revising it upward from 93.0 to 94.7. This pushes the Merlin composite consumer confidence up to an even higher sixteen-month high of 101.0. The highest previous reading was 99.0 in April.

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For a perfect ending to a perfect day, at the end of an almost-perfect week, two different indicators of future inflation registered declines in July. The Leading Inflation Index published by the Columbia University Center for International Business Cycle Research (CIBCR) dropped from 103.5 to 102.8 from June to July. The monthly Future Inflation Gauge of the Economic Cycle Research Center (ECRC) also declined from June to July, dropping from 105.7 to 104.7.