17 Dec 2010 Steady Improvement
Inflation continues to be subdued at the consumer level, but one wonders for how long as prices continue to rise for producers of goods and services. Other economic indicators released during the week were mostly positive, some strongly so. The US equity markets are largely unchanged on the week while Treasures gave up .56%. However, there were two strong buying days for Treasuries indicating the two-month slide may be reaching a climax.
At the producer level, inflation picked up in November for both the headline and the core rates. The overall PPI inflation rate jumped to a monthly 0.8% increase from a 0.4% rate in October, and higher than forecast. The core rate which excludes food and energy increased 0.3% after dropping 0.6% in October. The seasonally adjusted year-on-year rate decreased to 3.5% from 4.3% in October. Inflation at the producer level is increasing, especially for food and energy, but pass through to consumers has been limited.
Consumer inflation was more moderate for November as food and energy price increases were not as strong as feared and other prices came in softer than expected. The overall CPI in November rose only 0.1%, which follows a 0.2% increase in October. Excluding food and energy, CPI inflation firmed to up 0.1% from no change the month before. Year-on-year, the headline CPI inflation rate rose to 1.1% (seasonally adjusted), down from 1.2% in November.
Retail sales came in at a much stronger 0.8% for November than was expected by economists and analysts. The robust gain follows an upwardly revised 1.7% leap in October. Economists wonder though how much of the gains were related to inflation? Excluding autos, sales were even stronger with a 1.2% rise, following a 0.8 percent jump in October. The leading booster for sales was gasoline station sales at 4%, which likely was price related. But the number overall, is a strong indicator that the economy is rebounding.
Manufacturing on balance remains strong too. Business inventories rose 0.7% in October in a compared to a very strong 1.4% rise in business sales. The comparatively small increase in inventory compared to sales indicates the need to build inventories faster which requires output and employees.
Industrial production improved on a rebound in utilities output from last month. Manufacturing was stronger than expected as well. Overall production improved in November, rising 0.4%, following a revised 0.2% dip the month before. Within manufacturing, gains were broad based. The output of durable goods rose 0.4%, and with the exceptions of nonmetallic mineral products and motor vehicles and parts, output advanced in all of the major industries. The production of nondurable goods rose 0.2%. On a year-on-year basis, overall industrial production edged down to 5.4% from 5.5% in October. Capacity utilization firmed to 75.2% in November from 74.9% in October, topping analysts’ expectations. According to Bloomberg, capacity utilization is at its highest level since hitting 75.4 in October 2008.
Manufacturing in the Mid-Atlantic region picked up for the month as reported by the Philadelphia Federal Reserve, Their business index rose nearly two points to 24.3 to indicate significant improvement in the participants’ subjective assessment of general business conditions. Manufacturers in the sample added to their workforces, but slightly slower than in November. However they sharply extended their workweek.
A similar polling of businesses by the New York Fed showed that general business conditions rose to 10.57 to indicate meaningful month-to-month expansion vs. October’s minus 11.14 which indicated meaningful contraction. This report was less upbeat on employment and orders than the Philadelphia report, but still positive.
The housing, which could use some good news, saw starts post a nice comeback in November, albeit off a very weak level the month before. Housing starts in November rebounded 3.9%, following a sharp 11.1% drop the prior month. The gain was led by a monthly 6.9% boost in single-family starts, following a 2.7% drop the month before. The multifamily component actually pulled down on the overall number, falling 9.1% after plunging 35.7% in October.
Permits, which indicate future builds fell back 4.0% in November after edging up 0.9% in October. Overall permits came in at an annualized rate of 0.530 million units and are down 14.7% on a year-ago basis. The data suggest a shift in demand away from the multi-family market toward single family homes. The multifamily component was down a hefty 23.0% while single-family permits improved 3.0%.
In a separate report, the National Association of Home Builders reported flat conditions at best so far in December according to the housing market index which is unchanged at 16. Details actually showed deterioration in buyer traffic, according to Bloomberg.
Today, the government reported that its Leading Economic Indicators index jumped 1.1% in November which follow gains of .5% each for September and October. Interest rate spreads, the continuing decline in jobless claims, stock prices, factory workweek extensions, and growth in the money supply were key drivers in November’s jump.
This morning, the US Congress passed the $858 billion bill extending for two years all Bush-era tax cuts, sending the measure to President Barack Obama for his signature. The President is scheduled to sign the measure into law at 3:50 p.m. today at the White House. Bloomberg reports that before the House voted 277-148 for final passage on the tax-cut agreement, members defeated an amendment crafted by liberal Democrats to express their displeasure with the bill and especially with a Republican-backed estate-tax proposal. Republicans said the bill would provide certainty about tax rates and would create jobs.
While the tax measures are temporary, reports from the meeting between CEO’s and President Obama have been very optimistic regarding substantive development of permanent business incentives designed to promote business growth and jobs. Provided more certainty in the regulatory and tax environment, American business seems poised and ready to step up their risk-taking activities. The cash is there and markets are improving, all that remains is ‘fire in the belly.’ While global growth is improving, it seems that a more certain regulatory and tax structure could provide powerful stimulus. Corporate consolidation and mergers will likely continue and even increase, but proof of a business resurgence will come in the form or real expansion – new plants and new jobs.
Merry Christmas!
