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Brian Wesbury
Chief Economist
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Bob Stein
Deputy Chief Economist
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 | The Consumer Price Index (CPI) increased 0.2% in January |
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| Posted Under: CPI • Data Watch |
Implications: Consumer prices rose in January, but the 0.2% increase was slightly less than the consensus expected. In the past three months, energy prices have dropped and so consumer prices are up at only a 1.2% annual rate. This is a stark contrast to the same three months a year ago, when consumer prices were rising at a 3.7% rate. As a result, year-ago price comparisons have been decelerating. Back in October, consumer prices were up 3.6% from a year ago; now prices are up 2.9% from a year ago. This deceleration is likely to continue into the Spring, which means prices will still be rising, but not as quickly as they were the same time a year ago. Do not expect the respite from higher inflation to last. Monetary policy is very loose and we are already seeing a resurgence in oil and gas prices. In addition, housing costs (which are measured by rents, not asset values) are rising as well. Owners' equivalent rent, was up 0.2% in January and is up at a 2.3% annual rate in the past six months. The ongoing shift from home ownership toward rental occupancy should boost this inflation measure even more in the year ahead. Meanwhile, "core" inflation, at 2.3% in the past year, is above the Federal Reserve's target. With loose monetary policy and housing costs accelerating, it's hard to see core inflation getting back down to the Fed's 2% target anytime soon. On the earnings front, "real" (inflation-adjusted) wages per hour were flat in January. Although these earnings are down 1% from a year ago, the number of hours worked is up 2.7%, giving consumers more purchasing power. No justification here for a third round of quantitative easing.
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| | Housing starts increased 1.5% in January to 699,000 units at an annual rate |
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| Posted Under: Data Watch • Home Starts • Housing |
Implications: More up-beat numbers on the housing market today. Housing starts easily beat consensus expectations for January and were revised up for prior months as well. Looks like the first quarter of 2012 will be the fourth straight quarter where home building boosts real GDP. Although the gains in January were all in the volatile multi-family sector and were likely boosted by unusually mild January weather, today's figures reinforce the upward trend for home building. Single-family starts are up 16.2% from a year-ago and the top chart to the right shows the strength in multi-family construction. Meanwhile, permits for future construction continue to gain. Notably, the number of single-family homes under construction increased 2.1% in January, the largest gain since 2004. The number of single-family starts exceeded the number of completions by an annualized 119,000 in January, the widest gap since the peak of the housing boom back in early 2006. As we wrote a few months ago, the long-awaited turning point in home building has arrived. Based on population growth and "scrappage," home building must increase substantially over the next several years to avoid eventually running into shortages. For more on the housing market, please see our research report (link). In other news this morning, the Philadelphia Fed index, a measure of manufacturing activity, increased to +10.2 in February from +7.3 in January. Once again, reports show both factories and home builders lifting economic growth.
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| | The Producer Price Index (PPI) rose 0.1% in January |
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| Posted Under: Data Watch • PPI |
Implications: Forget about producer prices for a second. New claims for unemployment insurance dropped 13,000 last week to 348,000, the lowest level since March 2008. The four-week average dropped to 365,000. Continuing claims fell 100,000 to 3.43 million, the lowest since August 2008. These figures suggest continued robust gains in payrolls for February. On the inflation front, today's figures on producer prices were just plain weird. Given the increase in oil prices in January, the consensus expected a gain of 0.4% in overall producer prices. But the government says energy prices went down instead, mostly due to lower home heating costs, both for natural gas and home heating oil. As a result, the overall PPI was up only 0.1%. Meanwhile, a surge in pharmaceutical drug and light truck prices helped push up "core" producer prices (which excludes food and energy), by 0.4%, which was more than the consensus expected 0.2% gain. Again, just an odd report, with many components that will probably reverse over the next few months. Overall producer prices are up 4.1% from a year ago. However, given the rapid increase in prices early last year, the year-ago comparisons on prices will probably show slower inflation for the next several months. In the meantime, you'll probably see some stories about how the Federal Reserve was right all along and that inflation is not a problem. Don't believe them. Given the loose stance of monetary policy, we think PPI inflation will be heading north again later in the year. Ironically, the Fed itself can't see today's report as good news on inflation. It says it focuses on core prices, which are up 3% from a year ago and up at a 3.2% annual rate in the past three months. We continue to believe the Fed has no room to implement another round of quantitative easing.
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| | Industrial production was unchanged in January |
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| Posted Under: Data Watch • Industrial Production - Cap Utilization |
Implications: Today's report on the factory sector was very deceptive. Industrial production was unchanged in January, which was much less than the consensus expected. But prior months were revised up by 0.6%. More importantly, overall industrial production was held down by a steep drop in utility and mining output. Warm weather means less energy use. Taking out utilities and mining leaves just the manufacturing sector, which rose 0.8% in January and 1.4% including upward revisions for prior months. The January surge was led by a 6.9% gain in auto production. Excluding autos, which are volatile from month to month, manufacturing still increased a solid 0.4%. Higher production is making factories use higher levels of capacity. Utilization in manufacturing is now at 77%, the highest since April 2008 and near the 20-year average of 77.7%. As capacity use moves higher, firms have an increasing incentive to invest in more plant and equipment. Meanwhile, corporate profits and cash on the balance sheet show they have the ability to make these investments. In other news today, the Empire State index, a measure of manufacturing activity in New York, increased to +19.5 in February from +13.5 in January. As recently as October, the index was -7.2. On the housing front, the market index from the National Association of Home Builders, which measures their confidence, increased to 29 in February, beating consensus expectations and the highest reading since 2007. As recently as September, the index was 14. The bottom line is that US manufacturers and home builders both have reason to cheer.
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| | Retail sales grew 0.4% in January |
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| Posted Under: Data Watch • Retail Sales |
Implications: Retail sales grew less than expected in January, but are still consistent with respectable economic growth. Surprisingly, despite automakers reporting sales at the fastest pace since early 2008, motor vehicles were the weakest part of January retail sales according to today's government report. The gap between the two reports may mean a portion of the January surge in auto sales were "fleet" sales, such as rent-a-car companies. If so, the sales will show up in business investment, rather than consumer spending. However, auto companies have claimed better sales to consumers...which, could mean the January data are mistaken. Outside the auto sector, sales looked better in January, growing 0.7%, the fastest pace since March 2011 and better than the consensus expected 0.5%. However, sales ex-autos were revised down for November/December. Given the mixed news in today's report, it's important to look at the underlying trend and that remains undeniably positive. Overall sales are up in 18 of the last 19 months and 5.8% above where they were a year ago, easily outstripping retail inflation. In other news this morning, business inventories were up 0.4% in December, which rounds out the final monthly data needed to revise GDP. These data suggest that the original estimate of 2.8% annualized real GDP growth in Q4 was close to the mark and will not be revised in any significant manner. On the inflation front, import prices increased 0.3% in January, but were unchanged excluding oil. In the past year, import prices are up 7.1% but up only 2.5% excluding oil. Export prices were up 0.2% in January, but unchanged excluding agriculture. In the past year, export prices are up 2.5% and 3% ex-agriculture. The figures for January show a short-term lull in inflation. But the Fed better not take any victory laps. Given loose monetary policy, we expect inflation to re-accelerate again later this year.
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| | Be Confident in the Recovery |
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| Posted Under: Monday Morning Outlook |
Two prominent measures of consumer confidence dropped unexpectedly in recent weeks. This provided plenty of fodder to those who still think the US economy is teetering on the brink of a long awaited double-dip.
But when it comes to the consumer confidence data, the only thing we're confident about is that confidence doesn't matter. Not one bit.
There is no consistency between what consumers are actually doing and how they tell pollsters they feel. They may talk the talk, but they aren't walking the walk. While saying they lack confidence, consumers are buying vehicles at a relatively rapid rate. Auto and light truck sales jumped to a 14.2 million annual rate in January, the fastest pace since early 2008, even beating August 2009, which was the sales peak for cash-for-clunkers. At the same time, chain-store retail sales were up 4.8% from a year ago, and that only includes sales at stores open more than twelve months.
As we look ahead to this week's indicators (see our weekly table below), it is clear that the economy remains solidly in recovery mode. Industrial production, manufacturing surveys, housing starts and initial claims should all reaffirm the growth story.
And yet, consumer confidence measures remain deeply depressed. The Conference Board's measure is currently 61.1, well below its 20-year average of 93.0. The University of Michigan's measure of confidence is 72.5 versus a 20-year average of 87.6.
Both measures of confidence are lower than they were a year ago, despite roughly 2 million more payroll jobs – 2.2 million in the private sector – and more hours of work per worker, which signal even more jobs to come. Initial claims for jobless benefits are way down and manufacturing production is up more than 3.5% from a year ago.
The idea that "how people feel about things" is a driver of economic activity has taken a huge hit in recent times. But don't believe just one data point. Consumers were never more confident than in late 1999, just before the market crash and recession of 2000/2001. And in 2007, confidence hit its high point just before the sub-prime crisis and Panic of 2008 occurred.
Nonetheless, the popular press and many analysts still seem to regard these data as important. Our advice is to ignore it – confidence won't tell you where we are going.
Think of confidence like personal health. When do you finally get the flu? - after not being sick for a while, that's when. And when do you get better? - after you've been sick, that's when. In other words, the lower confidence is the more likely a recovery is either on-its-way, or underway.
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These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
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