February 20, 2010THIS WEEK’S HIGHLIGHTS
NEXT WEEK PREVIEWED
The Week in Review
US
The minutes of the FOMC meeting on January 26-27 contained no real surprises. There was a discussion about the Fed’s balance sheet. Members agreed that it needed to shrink substantially and ultimately consist solely of Treasury securities. But, they differed on the appropriate time frame and methodology (i.e. sales versus maturations) to achieve that. Meanwhile, members considered economic prospects essentially unchanged from the previous meeting:
“Information… indicated that economic growth had strengthened in the fourth quarter, that firms were reducing payrolls at a less rapid pace, and that downside risks to the outlook for economic growth had diminished a bit further. Participants saw the economic news as broadly in line with the expectations for moderate growth and subdued inflation in 2010 that they held when the Committee met in mid-December; moreover, financial conditions were much the same, on balance, as when the FOMC last met. Accordingly, participants’ views about the economic outlook had not changed appreciably.”
The Committee’s projections had not changed much either. Members now expect GDP to grow 2.8%-3.5% in 2010 (fourth quarter over fourth quarter), 3.4%-4.5% in 2011, and 3.5%-4.5% in 2012. They expect core PCE inflation to run at 1.1%-1.7% in 2010, 1.0%-1.9% n 2011, and 1.2%-1.9% in 2012. (Interestingly, the lowest number for 2012 is now 0.8% compared to 0.2% in November, implying a sense of reduced deflation risks). Unemployment is expected to be around 9.6% in 2010 (fourth quarter average), 8.4% in 2011, and 7.0% in 2012. Finally, over the long-term, growth is expected to average 2.5%-2.8%, suggesting that estimates of potential remain the same as November, despite some discussion at the meeting about possible structural damage from the financial crisis. Headline PCE inflation is expected to average 1.7%-2.0%, and unemployment 5.0%-5.2%, although the range runs as high as 6.3%.
This week’s housing data were solid, although not spectacular. Indeed, taken together, they imply that residential construction has stabilized, but is not about to rebound. First, homebuilder confidence finally improved. The National Association of Home Builders’ (NAHB) index rose 2.0 points to 17.0 in February, the first gain since September. Assessments of present and expected (single-family) sales rose, while prospective buyer traffic remained unchanged.
Second, housing starts rose to 591,000 (or 2.8%) in January from an upwardly revised 575,000 in December. The latest increase leaves starts at their highest level since July, although they remain stuck in the 525,000-600,000 range where they have hovered over the last nine months. The regional details were mixed, with starts jumping in the Northeast and West, edging up in the South and falling in the Midwest. Less positively, housing permits—a leading indicator of starts—slipped 4.9% to 621,000, although this follows two straight robust gains. Moreover, the weakness was concentrated in the volatile multi-family sector, which had tended to follow a saw-tooth pattern of late.
Industrial production continues to recover, jumping another 0.9% in January to record its seventh consecutive increase and reach its highest level since December 2008 (Chart 2, page 3). (It is now 5.5% above its June 2009 trough, although still about 10.0% below its December 2007 peak.) The strength was broad-based, with manufacturing rising 1.0%, mining 0.7% and utilities 0.7%. The latest gains raised the overall and manufacturing capacity utilization rates 0.7 and 0.8 percentage point, respectively. The former now stands at 72.6%, the highest since December 2008, over 4.0 percentage points above its June 2009 trough, but still well below its informal 81.0% “full-employment” level.
The Philadelphia Federal Reserve business outlook survey rose 2.4 points in February to 17.6, keeping it comfortably above the zero mark that differentiates between expansion and contraction in the Third District’s manufacturing sector. The details, which do not contribute to the headline, were decidedly mixed. New orders and shipments surged, but backlogs and vendor performance plunged. Input price inflation slowed slightly, but remained elevated.
The Conference Board’s index of leading economic indicators rose 0.3% in January, the tenth consecutive gain. Again, the details were mixed. The “softer” components (stock prices, yield curve, money stock and consumer expectations) contributed about 0.2 percentage point of the gain. The harder, real economy components chipped in just 0.1 point as declines in building permits and initial claims mitigated gains in the workweek and vendor performance.
Initial jobless claims unexpectedly jumped 31,000 to 473,000 in the week ended February 13, undoing much of the improvement in the previous week. However, it is unclear how reliable this print is, or if it the result is skewed in one direction or the other. The weather in parts of the country would have played havoc with construction, thereby boosting claims, while it also closed employment offices, reducing claims. Indeed, some states did not submit data for the week, obliging the Labor Department to make “guesstimates.” So, it is probably best to wait and see what next week brings.
The red ink is flowing. The Federal government deficit shrank by almost one-third in January, but only to $42.6 billion. Moreover, it brought the cumulative shortfall this fiscal year (since October 1) to $430.7 billion, compared to $395.9 billion in fiscal 2009. The Congressional Budget Office currently projects a deficit of $1,349 billion (or 9.2% of GDP) in fiscal 2010.
This week’s inflation data were mixed. But, it still seems as if headline inflation is generally accelerating, reflecting base effects and higher energy prices, while core inflation is stable to slowing. Consumer prices (CPI) rose 0.2% in January, primarily because of a 2.8% jump in energy prices. Core consumer prices, which exclude food as well as energy, actually slipped 0.1%, the first decline since 1982. Within the core, shelter fell 0.5% on lower hotel lodging rates, while apparel and recreation both slipped 0.1%. Conversely, medical care rose 0.5%, education 0.3%, and tobacco 0.4%. Year-over-year, CPI inflation decelerated a tick to 2.6%, but remained in an uptrend, while core inflation decelerated twp ticks to 1.6%, and appears in an erratic downtrend.
Producer prices (PPI) surged 1.4% in January largely because of a 5.1% surge in energy prices. Abstracting from that, prices rose 0.3%. Core prices, which exclude both food and energy, also rose 0.3%. Within the core, consumer goods rose 0.4% as a 1.3% jump in pharmaceuticals more than offset a 0.5% drop in passenger cars. And capital goods rose 0.3% as a 1.9% jump in light trucks offset a similar drop in computers. Overall and core intermediate goods prices rose 1.7% and 0.5%, respectively, while overall and core crude goods surged 9.6% and 6.6%. Year-over-year, overall PPI inflation accelerated another two ticks to 4.6% and is trending higher. Core PPI inflation accelerated a tick to 1.0% and appears stable.
To continue reading, go here. (c) State Street Global Advisors
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