The week's economic reports

Following is a summary of last week's economic reports. A broad increase in retail sales surprised nearly everyone while high energy prices continue to have an outsized impact on both rising inflation and ebbing consumer confidence. Stocks and bonds ended the week with the S&P 500 Index up 1.7 percent to 1533, now up 8.1 percent on the year, and the yield of the 10-year U.S. Treasury up 4 basis points to 5.16 percent.


Retail Sales: The Commerce Department reported that despite high gasoline prices, consumers increased spending on other items, overall retail sales climbing 1.4 percent in May after an upwardly revised decline of 0.1 percent in April. The increase in May was the largest in 16 months.

On a year-over-year basis, retail sales are now up 5.0 percent, an improvement from last month's annual gain of just 3.1 percent. The trend of the last year and a half remains decidedly downward, however, consistent with other economic reports signaling a second quarter rebound, consumers appear to have a new bounce in their step.


Expenditures at gasoline stations posted a monthly increase of 3.8 percent, but gains elsewhere were broad-based led by clothing and clothing accessories stores (up 2.7 percent) and building material and garden supply stores (up 2.1 percent). Excluding gasoline sales, the source of many rosy headline numbers over the last eighteen months, sales would still have been up 1.2 percent.

This report once again demonstrates that, even after a number of disappointing reports earlier in the year, the long anticipated slowdown of the American consumer is exceedingly difficult to predict.

Import/Export Prices: Prices for imported goods rose sharply in May, up 0.9 percent, surpassing expectations by a wide margin after a surge of 1.3 percent in April. Higher oil prices were the primary factor, the 2.7 percent jump in the cost of petroleum accounting for almost half of the overall increase. On a year-over-year basis, import prices are up only 1.1 percent, however this mild annual increase is heavily influenced by historically high prices for imported oil at this time last year. Export prices rose 0.1 percent in May and are up 4.3 percent from year ago levels.

Producer Prices: Paced by surging energy costs, prices for wholesale goods posted another strong increase in May, up 0.9 percent after a 0.7 percent increase in April. The core rate, excluding food and energy, rose 0.2 percent after no change the month prior. On a year-over-year basis, overall wholesale prices are up 3.9 percent and the core rate rose 1.6 percent.

Following a 3.4 percent increase in April, the PPI energy index rose 4.1 percent in May led by a surge in gasoline prices (up 10.2 percent) and heating oil (up 2.3 percent). Food prices were down 0.2 percent.

Consumer Prices: Consumer prices rose 0.7 percent in May, following a 0.4 percent increase in April and the core rate of inflation, excluding food and energy, rose 0.1 percent after an increase of 0.2 percent the month prior. On a year-over-year basis, overall inflation is up slightly from last month at 2.7 percent and core inflation dropped a bit to 2.2 percent.

Higher energy prices once again drove the overall index with a 5.4 percent increase in May after a gain of 2.4 percent in April. Gasoline prices rose 10.5 percent and fuel oil gained 1.8 percent. As an indication of how much rising energy prices affect the CPI, excluding energy from the overall index yields a monthly increase of only 0.2 percent. Elsewhere in the May report, prices paid for apparel fell 0.3 percent and education/communication costs rose 0.6 percent.


Core inflation rose 0.14978 percent in May, so the headline number of 0.1 percent (which equity markets quickly embraced) was a bit misleading - it was about as close to 0.2 percent as you could get without being 0.2 percent. A major factor helping to nudge this rate lower was the roughly 30 percent contribution of the nefarious owners' equivalent rent which rose a mild 0.1 percent after gains of 0.3 percent and 0.2 percent in March and April. Some observers believe that a glut of investment property hitting the rental market after sellers have refused to accept lower sale prices has caused this component to moderate in recent months.


While consumers are surely more interested in the prices they pay at the pump rather than how much rent their home might fetch, the mainstream financial media and nearly everyone on Wall Street quickly looked past surging energy prices, finding the good news that they were looking for in core inflation.

Industrial Production: Industrial production was flat in May after a downwardly revised gain of 0.4 percent in April and capacity utilization took a surprising drop from 81.6 percent to 81.3 percent. Manufacturing output rose modestly, up 0.1 percent, while business equipment was flat and consumer goods fell 0.2 percent.

Consumer Sentiment: The Reuters/University of Michigan index of consumer sentiment fell from 88.3 in May to just 83.7 in June, now sitting at a ten month low just above the levels seen last summer at the height of the gasoline price shocks. Excluding the months affected by Hurricane Katrina in 2005, the current level is the third lowest measure of the consumers' outlook in the last 52 months.

The high cost of filling their tanks is likely to blame for the dour mood of consumers lately as gasoline prices have remained elevated for months. During this time, the survey's measure of 12-month inflation expectations has ratcheted higher to 3.5 percent. Note that the Conference Board's Consumer Confidence survey shows inflation expectations over five percent in the most recent report.

Beige Book: The Federal Reserve's Beige Book, anecdotal accounts of business conditions in the 12 Federal Reserve districts, showed economic activity continuing to be "modest" with a small gain in consumer spending and ongoing weakness in housing. Hiring was steady with few signs of wage pressures developing and strain from energy prices continued to be felt.

Summary: Even without the effects of high gasoline prices, retail sales in May posted a strong rebound from the dismal showing in April, an indication that consumers should not yet be counted out, though the deck continues to be stacked against them. Retail sales and other measures of the well-being of the American consumer will be closely watched over the summer, many expecting that higher energy prices, higher interest rates, higher debt loads, and a continuing erosion of the "wealth effect" due to a slumping housing market will eventually result in a significant slowdown.

Both the PPI and the CPI were dramatically affected by higher energy prices though, in both cases, stripping out food and energy resulted in a core rate of inflation that shows continuing moderation. Import prices also jumped due to higher prices for oil. Driven largely by high gasoline prices, waning consumer confidence is clear in both the University of Michigan survey of consumer sentiment as well as the Conference Board's measure of consumer confidence released last week. The strong retail sales report is even more impressive when taking these factors into consideration.

The Week Ahead: Economic reports in the week ahead will be very light, highlighted by housing starts on Tuesday. Also scheduled for release are the housing market index on Monday and both leading economic indicators and the Philadelphia Fed survey on Thursday.