With little excess capacity left in the labor market, we expect continued upward pressure on wages.
On net, we'll see some damage and a hit to corporate profits and proprietors' income, but that effect is temporary. But in the next quarter, we will get some mild stimulus from the rebuilding. Certainly, it will have no major, permanent effect on the economy.
There has been some spotty signs of a cooling in the broader housing market.
With corporate balance sheets and cash flow strong, we look for investment spending to remain strong, pushing up growth in the capital stock and adding to labor productivity growth in 2006.
Warm weather and a post-December rebound in new activity will likely boost construction payrolls. Retail employment should also enjoy a post-holiday boost.
The fact that households are saving so little, even with strong growth in personal income, is a potentially troubling development.
The claims data are telling us that the labor market is continuing to improve and growing at a rate of about 200,000 jobs a month.
Further improvement in earnings and additional declines in the unemployment rate is likely to boost overall confidence and keep consumption strong.
Manufacturing activity in the region appears to have cooled off. We suspect it will be another month or two before auto manufacturers start ramping up production to replenish sales-depleted inventories.
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