Companies Keep Hiring as Demand Grows: U.S. Economy Preview

Jan. 1 (Bloomberg) -- U.S. employers added another 200,000 jobs last month as companies remained optimistic that the new year will bring more corporate investment and solid economic growth, according to a survey of economists before a government report this week. The estimate of new jobs created in December, the median forecast in a Bloomberg News survey of economists, follows an increase of 215,000 jobs in November. The Jan. 6 report from the Labor Department will probably also show the unemployment rate held at 5 percent, in line with the average over the last decade, according to the survey. Business investment in new equipment and operations will probably play a larger role in driving economic growth next year and compensate for any weakening in consumer spending, economists said. A gauge of manufacturing probably remained at a level showing strength in production and orders. "Corporations in America have made huge profits, but I think they've been hesitant to spend those profits'' so far, Timothy Kane, a research fellow at the Heritage Foundation in Washington, said in an interview. "Most of us think that the time has come that we will probably see a lot of expansion this year, a lot of hiring.'' Employers probably added 2 million jobs last year. The U.S. created 2.194 million jobs in 2004, the most since 1999, according to Labor Department statistics. The Institute for Supply Management is forecast to report on Jan. 3 a reading of 57.4 in its December index of manufacturing. That compares with 58.1 in November and is higher than the 55.7 average for all of 2005.

Growth Impulses
"The perspectives for the coming year can be described as solid,'' Thomas Amend, an economist at HSBC Trinkaus & Burkhardt KGAA in Dusseldorf, Germany, said in an interview last week. "Apart from consumption, which is one of the most important growth drivers in the U.S., we are also getting increasingly positive growth impulses from the investment side.'' Some factories are running out of spare capacity in their bid to meet demand, something Federal Reserve policy makers have indicated could push up inflation. On Jan. 3, investors may also get a sense of how much more Fed policy makers will raise their benchmark interest rate after 13 increases in a row. The Fed will release minutes of its Dec. 13 policy meeting at which they decided to stop saying there was "accommodation'' in interest rate policy. Central bankers also said "possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.''

Capacity Use
The amount of capacity in use at the nation's factories was 79.4 percent in November, matching October as the highest since September 2000. Bottlenecks typically develop and threaten to boost inflation when capacity utilization is around 81 percent, according to Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities in New York. With higher interest rates and a slowdown in the housing market making it less likely consumer spending will accelerate this year, the strength of the economy will depend more on how much companies upgrade equipment and plants. Less home price appreciation will limit refinancing, which has been a source of cash for consumer spending, economists said. "Chances are good that housing activity and prices will level out in the period ahead,'' economists at Citigroup said in a note to clients. "The chief by-product of such a development would be consumer spending growth more in line with, or somewhat below, disposable income growth.'' So far, consumer spending has remained robust. The week ended Dec. 24 was the best so far of the holiday shopping season with comparable sales rising 2.8 percent from the previous week, according to the International Council of Shopping Centers. The group reaffirmed its forecast of a gain of 3 percent to 3.5 percent for the season.

Retail Sales
The ICSC is forecasting the second-biggest sales gain for retailers since 1999. Sales rose 5.4 percent in 1999 and 4 percent in 2003. Including Internet purchases, spending has been even stronger. Sales from Oct. 29 to Dec. 23 rose to $30.1 billion, according to a survey conducted by research firm Nielsen/NetRatings, Goldman Sachs & Co. and Harris Interactive. Computer hardware and related equipment led the increase, rising 126 percent to $4.82 billion, followed by consumer electronics, up 109 percent to $4.79 billion. Shoppers were drawn by free shipping offers from retailers including Amazon.com Inc. and L.L. Bean Inc. Amazon.com, the world's biggest online retailer, said Dec. 26 holiday sales worldwide set a record this year, spurred by demand for iPod music players, video games and jewelry.
The Institute for Supply Management is forecast to report on Jan. 5 that its index of non-manufacturing business, which includes retailers, construction firms and other service providers, rose to 59 in December from 58.5. Readings higher than 50 indicate expansion. "We see very strong demand now,'' Stephen Bollenbach, chief executive officer of Hilton Hotels Corp., said in an interview last week from Beverly Hills, California. "It's really good times for our business. From a hotel perspective it's boom times.''