FACTORY ORDERS PERK UP

GROWTH IN PERSONAL INCOME SLOWS

CHICAGO MANUFACTURING INDEX JUMPS

CONSUMER CONFIDENCE STAYS HIGH

The June slowdown in Manufacturers' Shipments, Inventories, and Orders (a.k.a. Factory Orders) picked back up in July.

The Commerce Department's Bureau of the Census reported today that new orders for manufactured goods in July increased $5.5 billion or 1.8 percent. This compares with a 0.7 decrease in June and is the fourth increase in the last five months. When the volatile trasportation sector is excluded, new orders rose by 2.1 percent, for the third increase in four months. For the first seven months of the year, new orders are 4.9 percent ahead of last year.

Shipments of manufactured goods rose in three of the last four months, rising $3.8 billion or 1.2 percent in July. This follows a 0.8 percent decrease last month. Year to date, shipments are 3.8 percent above the same period last year.

Unfilled orders increased by $5.0 billion or 1.0 percent in July, outpacing a 0.7 increase in June. This was the tenth increase in the last eleven months. The unfilled orders-to-shipments ratio rose slightly to 2.93, up from 2.91 in June. Inventories increased $0.7 billion or 0.2 percent following a 0.1 percent June decrease. The inventories-to-shipments ratio was 1.39, down from 1.40 in June. The July ratio is the lowest since the 1.39 recorded in January 1995.

All in all, the figures on shipments, inventories and orders present a picture of continuing demand from distributors of manufactured goods.

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Personal income and expenditures for July painted an emphatically less dazzling picture of economic activity at the consumer level. In today's report from the Commerce Department's Bureau of Economic Analysis we find that the growth in personal income in July was far less than it has been in recent months. In March, April, May, and June, personal income grew by 0.4 percent, 0.5 percent, 0.5 percent and 0.9 percent. In July it only grew by 0.1 percent.

As we've noted before, consumer expenditures account for some 2/3 of the Gross Domestic Product. And, if you don't have it, you can't spend it. So, if the slowdown in personal income persists, it could slow down the general economy. In July, inflation-adjusted personal expenditures were unchanged from June. In June, expenditures dropped by 0.4 percent.

As in June, consumers appear to be stashing away more money. The personal saving rate, expressed as a percentage of after-tax income, was 5.3 percent in July -- matching the multi-month high set in June.

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I usually avoid spending a great deal of time discussing the Chicago purchasing managers' report, because the more-comprehensive report on nation-wide conditions by the National Association of Purchasing Management (NAPM) comes out shortly following the Chicago report. The Chicago report for August was released today, and it was a doozy. The Chicago index of overall manufacturing activity jumped from 51.2 to 60.0, and the sub-indexes for production, new orders, unfilled orders and employment all improved. All of this seemed to make a big impression on bond market traders today. Personally, I'm going to reserve judgement until next Tuesday when the report from the national organization comes out.

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In a final story, the University of Michigan's final estimate of consumer sentiment in August became available today. Today's report revised the August number up from 94.5 to 95.3. This compares with a 94.7 reading in July and is the highest reading in the 17 months since I began following this indicator. But, as I said yesterday, the last time consumers got feeling this warm and fuzzy about economic conditions was just before the onset of the 1990-91 recession. I personally wouldn't invest any money based on these consumer opinion polls.

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Summing up: Vendors are eagerly stocking their shelves with manufactured goods; but, consumer income appears, at least temporarily, to have dried up. In the past couple months, consumers have turned to less spending and more saving. The Chicago purchasing managers' survey seems to echo the message of the report on shipments and orders for manufactured goods; but, I'm going to wait to see what the NAPM report says next week. Consumers participating in the most recent polls by the University of Michigan and the Conference Board, appear to be more satisfied with their economic situations than they have at any time in the last year and a half.

As far as the markets go, bond traders accentuated the positive indications in today's news and turned negative on their outlook for bond prices. The 30-Year T-Bond price got whacked by a full point -- even worse than yesterday's 22/32 drubbing. Stock traders emulated bond traders this morning. But, there must have been some bargain hunters lurking around the stock market because, after triggering program trading curbs this morning, the DJIA trimmed its loss to 31.44 points.

Pat Lafferty (MF Merlin)