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More Signs Point to Economic Rebound
NEW YORK — Thursday brought fresh signs that the economic
recovery was speeding up, with manufacturing activity accelerating
in the mid-Atlantic region and nationwide employment at least
holding steady if not gaining ground.
Evidence is mounting that the economy may finish the year
strongly and carry its momentum into 2004, although job creation
may continue to lag, analysts said.
But as the economic outlook improves, the picture for bond
interest rates, and mortgages, is worsening: Bond investors
reacted to Thursday's reports with renewed heavy selling that
drove yields on two-year and five-year Treasury notes to their
highest levels since last year.
The jump in those shorter-term Treasury yields suggests that
more bond investors believe the day is drawing nearer when
the Federal Reserve will begin to tighten credit, responding
to the stronger economy.
On Thursday, however, at least three Fed officials reiterated
the central bank's resolve to support the recovery by keeping
its benchmark short-term rate at the current 45-year low of
1% for the foreseeable future.
In prepared remarks to the San Diego Rotary Club, Robert Parry,
president of the Fed's San Francisco bank, said the Fed faced
no pressure to raise rates in a preemptive strike against inflation,
unlike during previous recoveries.
"This is the first expansion in over 40 years that began
with a very low inflation rate. So the response of monetary
policy isn't necessarily going to be typical, either," Parry
said.
In separate speeches, William Poole and Robert McTeer, presidents
of the Fed banks of St. Louis and Dallas, respectively, also
tried to soothe bond investors by stressing low inflation and
the Fed's interest in keeping monetary policy stable for the
time being.
Data on Thursday from the Fed's Philadelphia bank helped stoke
optimism about the economy. The bank said its general business
index rose to 22.1 in August from 8.3 in July, far above the
consensus estimate of 10. The August reading is the highest
in five years, with new orders and shipments rising strongly.
The index — based on a survey of manufacturers in eastern
Pennsylvania, southern New Jersey and Delaware — is notoriously
volatile, but economists said it shows that the factory sector
is improving and that plant managers expect a further pickup
in the months ahead.
In another report, the New York-based Conference Board said
its index of leading economic indicators rose 0.4% in July,
on target with consensus expectations. It was the fourth straight
monthly increase in the index, which is meant to predict economic
performance three to six months ahead.
On the jobs front, initial claims for unemployment benefits,
as reported by the Labor Department, fell by 17,000 to 386,000
in the week ended Saturday, the lowest level since February
and below analysts' consensus estimate of 395,000.
Last week's Northeast power blackout may have kept some laid-off
workers from filing claims, artificially lowering the overall
number, economists said. Still, the claims data over the last
month have been well below spring levels.
Though the economy has officially been in recovery since December
2001, 1 million jobs have been lost since then.
The latest data suggest "we're at least not losing jobs
anymore, but we're at a standstill," said Brett Mitstifer,
portfolio manager for Value Line Investments in New York. "We
probably won't see a lot of hiring until the fourth quarter," he
said. "Firms seem to want to hold off as long as they
can."
John Lonski, economist at Moody's Investors Service in New
York, said there had been a recent surge in the hiring of temporary
workers, which he said was a way for firms to fill needed jobs
without locking themselves into a long-term commitment and
expensive benefits.
"It remains to be seen whether the recovery is self-sustaining,
that it can last long enough to finally force business to expand
production and hiring," Lonski said.
The bond market, at least, appears to believe the economy's
turnaround is for real, and that it will lead to higher interest
rates. The two-year T-note yield jumped to 1.90% on Thursday
from 1.80% on Wednesday, and is the highest since December.
The five-year T-note rose to a one-year high of 3.44% from
3.34%.
The 10-year T-note, a benchmark for mortgage rates, rose to
4.48% from 4.44%, holding below the recent peak of 4.56% reached
Aug. 13. But the average rate on 30-year mortgages nationwide
edged up this week to 6.28% from 6.24% last week, according
to mortgage firm Freddie Mac.
CHARLOTTE, N.C. - Surging sales at company-owned stores helped
Krispy Kreme Doughnuts Inc. beat Wall Street's expectations
yesterday, as it reported a 47 percent increase in its second-quarter
profit.
Still, its shares stumbled as the stock was downgraded.
J.P. Morgan analyst John Ivanhoe lowered his rating on Krispy
Kreme shares, telling his clients he had concerns about "new
unit productivity, a higher-risk long-term growth model, and
the stock's rich valuation."
Krispy Kreme's share price fell $1.42, or 2.9 percent, to
close at $47.50 yesterday on the New York Stock Exchange.
In the fiscal quarter that ended Aug. 3, Krispy Kreme earned
$13 million, or 21 cents per share, compared with $8.9 million,
or 15 cents per share, in the second quarter of 2002. That
beat by a penny the consensus estimate of analysts surveyed
by research firm Thomson First Call.
"It's been an extremely exciting quarter, during which
we reached several milestones," Chairman and President
Scott Livengood told analysts. "In many cases, we were
able to meet and sometimes exceed expectations.
"These second-quarter results provide a strong foundation
for the balance of the year."
Krispy Kreme also increased its full-year earnings forecast
to 91 cents per share, a penny above its previous outlook.
Analysts surveyed by First Call had a consensus estimate of
89 cents per share.
Revenue increased 41 percent to $161.8 million, compared with
$114.6 million last year. Sales from the company stores increased
40 percent to $104.3 million, and revenue from franchise operations
grew 25 percent to $6 million.
Livengood said the company met with "great success" when
it opened its first store outside North America in Sydney,
Australia, and served the first Krispy Kreme doughnuts in a
French-speaking environment in Montreal, Canada, at a store
that opened there in May.
In the first half of the year, Krispy Kreme's net income grew
48 percent to $26.1 million, or 43 cents per share, from $17.7
million, or 30 cents per share, a year earlier. Sales increased
38 percent to $310.5 million, compared with $225.7 million
a year ago.
During the quarter, 22 Krispy Kreme stores were opened in
12 new markets. The new outlets included the ones in Australia
and Canada, and a commissary in London. The company also added
stores in Texas, Rhode Island, South Dakota, Indiana, Michigan,
Pennsylvania, New Jersey and Oregon.
The store that opened in Medford, Mass., a Boston suburb,
set a new opening-week sales record of $506,917, the company
said.
Founded in 1937 in Winston-Salem, Krispy Kreme operates 307
stores. Krispy Kreme produces more than 2.7 billion doughnuts
each year.
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