The week's economic reports

Following is a summary of last week's economic reports. Higher consumer credit, a decline in retail sales, and higher energy prices leading to a wider trade deficit were the major developments. Stocks and bonds ended the week with the S&P 500 Index flat at 1506, still up 6.1 percent on the year, and the yield of the 10-year U.S. Treasury up 3 basis points to 4.67 percent.


Consumer Credit: Warm weather in March had consumers purchasing automobiles in big numbers as non-revolving credit rose by $6.7 billion, the largest monthly increase since last October. Overall, consumer credit rose $13.5 billion, an annualized increase of 6.7 percent, after an upwardly revised increase of $5.5 billion in February. Revolving credit rose $4.6 billion, largely a result of higher gasoline prices.

This higher than expected increase in consumer debt is part of a general increase in revolving credit after home equity borrowing began to level out about a year ago. With higher adjustable rates for home equity lines of credit, fewer consumers are opting to finance vehicle purchases via mortgage equity withdrawal choosing traditional financing instead.

International Trade: The U.S. trade gap with the rest of the world widened from a downwardly revised $57.9 billion in February to $63.9 billion in March primarily due to higher prices for imported oil. Based on an increase from $50.71 per barrel in February to $53.00 in March, oil imports rose $3.6 billion accounting for more than half of the overall increase.

Trade with China narrowed $1.2 billion in March but widened with Mexico, the European Union, and Canada, by $1.6 billion, $1.3 billion, and $1.0 billion respectively. Once again, the impact of higher oil prices is clear to see in this report and the wider than expected deficit will cause a downward revision to first quarter real GDP that originally came in at a 1.3 percent annualized growth rate. Current estimates are that real GDP for the first quarter could be revised as low as 0.6 percent.

Import/Export Prices: More expensive petroleum products drove imported prices 1.3 percent higher in April after a downwardly revised 1.5 percent increase in March. Excluding crude oil imports, prices rose only 0.3 percent in April following an increase of 0.2 percent in March, again, continuing evidence of the impact that oil prices have on so many economic statistics. Since the price of crude oil dropped in April, next month's import prices should begin to show moderation. Export prices rose 0.3 percent after a 0.7 percent increase in March.

Retail Sales: Retail sales came in well below expectations in April, falling 0.2 percent after an increase of 0.7 percent in March. Excluding motor vehicle sales, retail sales were flat in April after having gained 0.8 percent in March. Data for both February and March were revised upward, but nonetheless, when combined with a horrible same store sales report on Thursday where Wal-Mart posted its worst monthly result in 28 years, there is clearly a slowdown underway in consumer spending, a point made clear in the chart below.


To make matters worse, higher gasoline station sales make the headline number better than it would otherwise appear - excluding fuel purchases, overall retail sales fell 0.4 percent. On a year-over-year basis, overall retail sales rose only 3.2 percent and, excluding motor vehicles, sales were up only 3.6 percent from year ago levels.

Some mitigating factors in the report were an early Easter in March that stole sales from April and erratic weather across parts of the country. After retail sales data is released for May and June, the longer term trend should become more clear, but it certainly looks as though the long anticipated consumer slowdown has begun. This reduced spending should have a negative impact on economic growth for the second quarter.

Producer Price Index: Overall producer prices jumped sharply again in April due to higher energy prices, the producer price index rising 0.7 percent after a 1.0 percent increase in March. Core PPI, excluding food and energy, was flat in April for the second consecutive month after an increase of 0.4 percent in February. On a year-over-year basis, the overall PPI rose 3.2 percent and the core rate gained 1.6 percent.

Energy prices rose 3.4 percent led by an 8.2 percent rise in gasoline prices and a 4.8 percent increase in heating oil. Prices for food products were subdued, rising only 0.4 percent in April after increasing 1.4 percent in March, and automobile and light truck prices fell 1.0 percent and 0.5 percent, respectively. As expected, equity markets loved the news of tame "core" inflation as the mainstream financial media blared headlines such as "Key inflation measure hold steady".

FOMC Meeting: The Fed meeting came and went resulting in what was described here as "probably the most boring policy statement following a Federal Open Market Committee meeting ever". The Wall Street journal saw fit to quote this in their MarketBeat blog, the characterization probably deemed not far from the mark. As expected, rates were left unchanged and the policy setting committee acknowledged a slowing economy and consumer prices that aren't coming down as they would like.

Summary: Higher oil prices and reduced home equity withdrawal are now beginning to show up in many economic statistics. Consumer credit rose sharply once again after homeowners continued to shift back to revolving and non-revolving credit rather than tapping home equity to fund spending, in many cases essential spending - in the U.K., this problem is even more acute. Unfortunately, much of this spending is going toward higher gasoline prices, as evidenced by disappointing same store sales and the decline in April retail sales.

The trade deficit widened and import prices rose, again driven by higher prices for petroleum products in recent months, all of this making it more difficult for the U.S. dollar to maintain its value against other currencies and sustain its role as the world's reserve currency.

Interestingly, Congress has begun holding hearings on how the middle class is being squeezed by rising prices and modest income gains. This account of last week's Senate Finance Committee meeting speaks volumes on the current situation where health care and energy costs are the primary challenge for working families. Due to an increasing share that employers require workers to pay, "while average annual compensation for a full-time U.S. worker increased by nearly $3,000 between 2000 and 2005, only $849 of that showed up as a wage increase." Add this to gasoline prices now averaging just over $3 a gallon (much pricier in some areas) and it's hard to understand how this continues to be called an era of "low inflation".

The Week Ahead: Economic reports in the week ahead will be highlighted by consumer prices on Tuesday and housing starts on Wednesday. Also scheduled for release are industrial production on Wednesday, consumer sentiment on Friday, and regional manufacturing reports from New York on Tuesday and Philadelphia on Thursday.