The Week's Economic Reports

Following is a summary of last week's economic reports. Rising prices, tepid retail sales, faltering regional manufacturing, and fading consumer confidence are not what many economists and market observers were wanting to hear last week, but that's what they got. Aside from what appears to be a one-off boost in industrial production, there is little positive news in the most recent batch of economic reports. As for stocks and bonds, the S&P 500 Index fell 1.1 percent to 1,387, now down 2.2 percent on the year, while the yield of the 10-year U.S. Treasury note dropped 5 basis points to 4.54 percent.


Retail Sales: Rising gasoline prices made the February retail sales figures better than they would have otherwise been, but retail spending came in below expectations nonetheless. Overall sales rose only 0.1 percent in February following no change in January. If automobile sales are excluded, sales fell 0.1 percent in February after an increase of 0.3 percent in January. Inclement weather in much of the country likely depressed retail activity in the most recent reporting period.

Amid rising prices at the pump, gasoline station sales rose 1.2 percent in February and if these sales are excluded from the February data, overall retail sales were flat. On a year-over-year basis, overall retail activity was up 3.2 percent. If automobile purchases are excluded, the annual gain was 3.1 percent. Retail sales have unquestionably been trending lower over the last year, however, the American consumer has been resilient. With recently sagging consumer confidence, this may be about to change.

Import/Export Prices: Both import and export prices rose more than expected in February, a continuing sign that inflation has not yet been brought under control after oil prices plunged in the second half of 2006. The cost of petroleum products rose 2.0 percent in February contributing to the sharp increase in import prices, up 0.7 percent in February after rising 0.3 percent in January.

Producer Prices: Producer prices rose sharply in February, up 1.3 percent after a decline of 0.6 percent in January. The core rate, excluding food and energy, climbed 0.4 percent for the month after an increase of 0.2 percent in January. On a year-over-year basis, overall producer prices have risen 2.6 percent and core producer prices have gone up 1.8 percent.

After falling 4.6 percent in January as a result of falling prices for crude oil, the energy component of the overall index rose 3.5 percent led by rising prices for heating oil (up 6.0 percent), gasoline (up 5.1 percent), and natural gas (up 4.1 percent). Though the producer price data is much more volatile than the consumer equivalent, this report is a strong reminder that energy prices still play a key role in inflation statistics.

Empire State Index/Philadelphia Fed Survey: Both the New York Empire State Index and the Philadelphia Fed Survey showed weakness in regional manufacturing activity during the March reporting period. The New York survey has recently been stronger and far more volatile than the survey from Philadelphia, but for the first time since April of 2003, both readings are near the zero mark indicating little or no growth.

The Empire State Index fell from 24.4 in February to a reading of 1.9 in March, while the Philadelphia Fed Survey fell from 0.6 in February to 0.2 in March. Both measures were led down by fewer new orders, backlog decreases, and inventory contraction.

Consumer Prices: The consumer price index rose 0.4 percent in February after a 0.2 percent increase in January while core consumer prices rose 0.2 percent following a 0.3 percent gain the month prior. On a year-over-year basis, overall prices are up 2.4 percent and the core rate stands at 2.7 percent.

Energy prices rose 0.9 percent in February, led by fuel oil (up 1.7 percent) and gasoline (up 0.8 percent) with more price increases expected for the March report. Prices for food and beverages rose a hefty 0.8 percent for the month led by a 4.7 percent increase for fruits and vegetables while meats, poultry, cereals, and bakery products all rose 1.1 percent.

As shown in the chart depicting overall CPI below, after energy prices plunged last fall, there have now been three consecutive months of increases to overall consumer prices with higher energy prices expected for next month.


During the last two months core consumer prices have been rising at rates above most economists' comfort level, the year-over-year change to core inflation not receding significantly after soaring energy prices plunged in August and September.


This does not bode well for the Federal Reserve should they feel compelled to lower short-term interest rates in an effort to support falling asset prices in both the housing market and in recently stumbling equity markets. Continuing price pressures will make this decision more complex than it would otherwise be (more on this topic in the summary below).

Industrial Production/Capacity Utilization: Both industrial production and capacity utilization exceeded consensus estimates in February. Led by an increase in utilities output (up 6.7 percent), overall industrial production rose from 0.3 percent in January to 1.0 percent in February. Overall capacity utilization increased to 82.0 percent from a level of 81.4 percent during the month prior.

Consumer Sentiment: The measure of consumer confidence from the University of Michigan hit a six month low at 88.8, down from last month's reading of 91.3, and may be an indication that the mood of the American consumer is changing. Despite higher gasoline prices, inflation expectations remained at 3.0 percent, but as discussed at the blog last week in The Relevance of Inflation Expectations, there has been a good correlation between these two in recent years. Should gasoline prices remain elevated, look for a higher level of inflation expectations and a lower overall confidence level next month.

Summary: Get ready for more talk of "stagflation" after the inflation reports of last week are viewed alongside continuing weakness in manufacturing and housing. Across the board price increases with more upward pressure from energy prices in next month's inflation reports could mean that monetary policy decisions become exceedingly tricky in the months ahead.

It increasingly looks like the Fed will be faced with a choice of either trying to "save the economy" by lowering short-term interest rates or remaining "vigilant" in the face of price pressures that continue to put inflation at rates above well-publicized comfort levels.

There should be some indication as to what is on the mind of the Federal Reserve Chairman Ben Bernanke with the policy statement accompanying next week's Federal Open Market Committee meeting. In light of recent market turmoil and the latest round of inflation data, this will be one of the most widely anticipated Fed policy statements in since last summer.

The Week Ahead: The meeting of the Federal Open Market Committee will highlight next week's economic news. While no change to short-term interest rates is expected, Fed comments on mortgage lending and the housing market as they relate to economic growth will be closely scrutinized for any indication of a change in policy stance. Three important reports on housing are due including the homebuilders housing market index on Monday, housing starts on Tuesday, and existing home sales on Friday. The Conference Board's leading economic indicators will be released on Thursday.