The week's economic reports

Following is a summary of last week's economic reports. The rising cost of energy affected both consumer prices and retail sales though equity markets were more than happy to focus on inflation without energy and discount the boost that higher energy prices provided for retail sales. Stocks and bonds ended the week with the S&P 500 Index up 2.2 percent to 1,484, now up 4.6 percent on the year as the Dow Jones Industrial Average made new all-time highs, and the yield of the 10-year U.S. Treasury note fell 9 basis points to 4.67 percent.


Retail Sales: Retail sales rose 0.7 percent in March following an upwardly revised gain of 0.5 percent in February. Excluding motor vehicles, retail sales rose 0.8 percent following an upwardly revised increase of 0.4 percent the month prior. As was the case for much of last year, an increase in purchases at gasoline stations (up 3.1 percent) as a result of higher gas prices had an outsized impact on the headline numbers. Excluding automobile and gasoline station sales, retail sales increased only 0.4 percent for the month - still a healthy increase, but only about half of the overall increase. On a year-over-year basis, overall retail sales are up 3.8 percent and, excluding automobiles, sales are up 3.9 percent.

Asha Bangalore at Northern Trust had an interesting comment on this report:

The headline number for retail sales in March (+0.7%) appears bullish but upon closer examination, after adjusting for inflation, the March retail sales number is on the soft side in Q1 and arithmetic points to a soft Q2 also. Inflation-adjusted retail sales in March (using the commodities price index from the Consumer Price Index report) fell 0.5% after a 0.1% increase in February and a steady reading in January. Inflation-adjusted retail sales in the first quarter grew at an annual rate of only 1.93% compared with an 11.2% increase in the fourth quarter. Therefore, consumer spending has certainly shifted to a lower gear. What about retail sales in the second quarter? The inflation-adjusted retail sales number for March ($2.247 billion) is lower than the first quarter average ($2.255 billion), implying that the arithmetic of averaging does not favor a strong performance of retail sales in the second quarter.

To summarize - when taking into account markedly higher prices in the first quarter relative to the fourth quarter of 2006, retail sales are not nearly as robust as indicated in recent reports.

Empire State Index: After showing surprising strength over the last year, in contrast with the Philadelphia Fed Survey, the New York Empire State Index has now posted two consecutive disappointing reports. Following last month's reading of 1.9 and expectations for a double-digit figure this month, the April index came in at only 3.8, far below the average of about 15 over the last year and a half. This does not bode well for manufacturing in the New York area and may accelerate legislation by Senator Charles Schumer aimed at trade with China.

Housing Market Index: The National Association of Home Builders housing market index fell to the lowest reading of the year, down three points to 33 in April after climbing to 40 in February. The low for all of 2006 occurred in September with a value of 30. Continuing mortgage lending woes have contributed to the loss in confidence by both builders and potential home buyers.

Consumer Prices: The Labor Department reported that following a February gain of 0.4 percent, overall consumer prices rose 0.6 percent last month, the largest monthly increase in eleven months. On a year-over-year basis, prices rose 2.8 percent, the highest annual gain in seven months.


Core consumer prices, excluding food and energy, rose 0.1 percent in March following increases of 0.3 percent in January and 0.2 percent in February. This will be welcome news for the Federal Reserve as the increases of the last two months have caused a good deal of concern that core consumer prices would not moderate as expected. On a year-over-year basis, the core rate stands at 2.5 percent, a continuation of the downward trend from last year's high of 2.9 percent, reversing the trend of the last two months.


Energy prices rose 5.9 percent paced by a 10.6 percent increase in gasoline prices and a 3.5 percent gain in heating oil. Aside from energy, there were few other surprises - apparel fell 1.0 percent and medical care costs rose only 0.1 percent. Food and beverage prices increased 0.3 percent while housing costs rose 0.2 percent, rent and owners' equivalent rent gaining 0.1 percent and 0.3 percent, respectively.

This report indicates that the recent increase in energy prices has not yet impacted other consumer prices in a meaningful way, however, since gasoline and other energy costs have continued to rise since the cut-off date for the March report, absent any reversal in the weeks ahead, look for higher energy prices in the April report with other categories possibly being affected.

Industrial Production and Capacity Utilization: Industrial production declined 0.3 percent in March after a downwardly revised 0.8 percent increase in February. The overall decline was led by a 7.0 percent drop in utilities output which more than offset a 0.7 percent gain in manufacturing output. Capacity utilization dropped from 81.6 percent in February to 81.4 percent in March. This appears to be the continuation of a gradual decline from near 82 percent in mid-2006 after having slowly risen from the mid-70s back in 2003.

Housing Starts and Permits: The Census Bureau reported a modest increase in the number of housing starts and permits for new construction during March. Starts increased 0.8 percent to a seasonally adjusted 1.518 million annualized rate following a rate of 1.506 million in February, revised down from 1.525 million.

As is usually the case, the previous month's data was revised down with the announcement of the latest data making last month's change worse than initially reported and casting doubt on the current month-to-month change, given the expectation for the same adjustment to occur next month. On a year-over-year basis housing starts are down 23 percent.


Building permits rose 0.8 percent to a 1.544 million annual rate following February's 2.5 percent decline to 1.532 million, a figure that was not revised. From year ago levels, permit issuance is down 26 percent.

The increase in building activity was stunning in the Midwest where construction surged 44.5 percent. Declines were seen in the rest of the country during March, activity in the West declining 7.7 percent and down 6.1 percent in the Northeast. Overall, despite the willingness of some to continue to do so (Treasury Secretary Hank Paulson being the latest), it is still far too early to call a bottom for the home builders.

Philadelphia Fed Survey: Business conditions in the Philadelphia Federal Reserve District remained sluggish, posting the second consecutive 0.2 reading and providing further confirmation of a general slowdown in manufacturing. This survey data averaged between 20 and 30 during 2004 and into 2005, but since mid-2005, there has been little expansion.

Summary: Following the better than expected core producer price report the week prior, last week's better than expected core consumer prices gave equity markets a reason to rally, but the celebration may be a bit premature. As was the case in both 2005 and 2006, elevated energy prices in the overall index take a few months to show up in elevated core inflation, something that may develop as soon as next month.

The headline retail sales number was widely hailed as a sign that the American consumer had not yet thrown in the towel but, as was the case last year and as predicted here last week, higher prices at the pump accounted for almost half of the March increase. While the retail sales figure was not bad, it was not nearly as good as reported in the mainstream media.

The Week Ahead: Economic reports in the week ahead will be highlighted by the advance estimate for first quarter GDP growth on Friday. Also scheduled for release are consumer confidence and existing home sales on Tuesday, durable goods and new home sales on Wednesday, and consumer sentiment on Friday.