Saturday, April 14, 2007
Following is a summary of last week's economic reports. Rising prices were once again the predominant theme as increases for both imported goods and wholesale products surprised to the upside while rising gasoline prices pushed consumer sentiment down. Stocks and bonds ended the week with the S&P 500 Index up 0.6 percent to 1,453, now up 2.5 percent on the year, and the yield of the 10-year U.S. Treasury note rose 1 basis point to 4.76 percent.
Import/Export Prices: Prices for imported goods climbed 1.7 percent in March following a 0.2 percent rise in February. The increase was led by a 9.0 percent jump in petroleum prices and sparked renewed inflation concerns. On a year-over-year basis overall import prices have now risen 2.8 percent, up from an annual increase of only 1.0 percent in February. Excluding petroleum, import prices rose 0.3 percent for the month and 2.9 percent for the year, also a marked increase from the month prior.
Export prices rose 0.7 percent in March, the same increase seen during February, led by prices for agricultural products that jumped 2.1 percent. On a year-over-year basis, export prices rose 5.3 percent, the largest annual increase since 1995.
Producer Prices: Higher prices for food and energy pushed producer prices up sharply in March for the second month in a row, the overall index rising 1.0 percent following an increase of 1.3 percent in February. On a year-over-year basis the index is now up 3.2 percent after an annual gain of 2.6 percent in February, a significant turnaround change from annual rates that were as low as -1.1 percent last October.
Energy prices increased 3.6 percent in March, led by an 8.7 percent spike in gasoline and a 3.3 percent rise in residential natural gas. Food prices rose 1.4 percent overall, led by a whopping 13.5 percent increase in the cost of fruits and vegetables.
Core producer prices, excluding food and energy, were flat in March after having risen 0.4 percent in February. On a year-over-year basis, the core rate now stands at 1.6 percent, down from 1.8 percent in February, part of a multi-month decline after having risen from lows near one percent last fall. As is normally the case, economists and traders focused on the level core reading rather than the much more alarming overall number figuring that the "underlying inflation trend", as indicated by the core rate, was benign.
International Trade: The U.S. trade deficit narrowed 0.7 percent in February to $58.4 billion from January's revised trade gap of $58.8 billion, coming in better than the consensus estimate of more than $60 billion. The trade report lags most other reports by a full month (e.g., the import/export prices reported on Thursday), so look for the impact of higher oil prices during March to show up in the trade report released next month.
Reflecting a drop in both the amount of oil imported as well as the price (down $1.52 to $50.71 per barrel during February), the total cost of imported goods fell 1.7 percent while exports declined 2.2 percent, largely a result of reduced exports of capital goods.
On a bi-lateral basis, the deficit with China narrowed from $21.3 billion to $18.4 billion, the gap with Japan increased from $6.5 billion to $7.1 billion, and with the Euro area, a small widening from $5.0 billion to $5.3 billion was seen.
Consumer Sentiment: The mid-month reading of the University of Michigan consumer sentiment index fell from 88.4 in March to 85.3, the lowest level in eight months. Once again, the change in consumer mood is inversely related to the change in gasoline prices which have been rising for several months now. Increased energy costs have pushed inflation expectations from 3.0 percent in March to 3.3 percent in April, still well below the 4+ percent as measured by the Conference Board's Consumer Confidence Index.
FOMC Meeting Minutes: The minutes of the March 20-21 FOMC meeting show that the Federal Reserve continues to view inflation risks as more important than slowing growth despite the market's reaction to the change in wording of the policy statement where the "inflation bias" was supposedly removed.
"At the same time, the prevailing level of inflation remained uncomfortably high, and the latest information cast some doubt on whether core inflation was on the expected downward path. Most participants continued to expect that core inflation would slow gradually, but the recent readings on inflation and productivity growth, along with higher energy prices, had increased the odds that inflation would fail to moderate as expected; that risk remained the Committee's predominant concern.This same sentiment has been expressed by a number of Fed officials in recent days. Aside from the impact on equity markets, there is little downside to the continued hawkish stance by the Fed since the incoming economic data, while mixed, does not point clearly to economic growth that is slowing faster than desired. Should weakness in labor markets develop, this could change quickly, making any changes to the policy stance much more difficult in the months ahead because of the potential impact on the U.S. Dollar.
"Most participants continued to expect a gradual decline in core inflation over the next year or two, fostered by stable inflation expectations, a likely deceleration in shelter costs, and a slight easing of pressures on resources. Nonetheless, all meeting participants expressed concern about the risks to this outlook. The latest readings on core inflation were higher than expected, and it was difficult to discern whether the apparent downward trend in core inflation during the past few quarters was continuing. Also, the recent increases in prices for energy and some non-energy imports likely would boost overall inflation in the near term and might put upward pressure on prices of some core goods and services. Moreover, rates of resource utilization that were near the high end of historical experience suggested a possibility that inflation pressures could build. Participants agreed that risks around the expected and desired path of a gradual decline in core inflation remained mainly to the upside; some noted that upside risks to inflation appeared to have increased slightly in recent months."
Summary: This is starting to feel like the period from late 2005 to mid 2006 again, just prior to the energy sell-off that began last August and extended into the winter. Back then, month after month, rising energy prices showed up in various economic reports in one form or another - inflation data, consumer confidence data, retail sales, international trade - don't be surprised if next week's retail sales report comes in higher than expected due to gasoline station sales, as was the case for much of the 2005-2006 period.
More will be known next week after consumer prices and retail sales are reported, but inflationary pressures are unquestionably building as a result of higher energy prices - not so much in crude oil, but in gasoline, natural gas, and heating oil that are up 35 percent, 25 percent, and 15 percent, respectively, since the beginning of the year. With lackluster capital equipment expenditures being the new growth concern on Wall Street and with the housing market continuing to show few signs of recovery, look for more talk of "stagflation" in the weeks and months to come.
The Week Ahead: Economic reports in the week ahead will be highlighted by retail sales on Monday and both consumer prices and housing starts on Tuesday. Also scheduled for release are the housing market index on Monday, industrial production on Tuesday, leading economic indicators on Thursday, and two regional manufacturing reports.