The May Producer Price Index fell .6% versus estimates of a .2% decline and a .6% increase in April. The May PPI Ex Food & Energy rose .1% versus estimates of a .2% increase and a .3% gain in April. US wholesale prices declined more than forecast in May as costs fell for gasoline, computers and automobiles. This was the largest decline since April 2003. Prices of raw materials, used at the earliest stage of the production process, declined 2.0%. Food prices fell .3%, computer prices declined 4.8% and passenger car prices fell .2%. The data reinforces comments last week from Fed Chairman Greenspan that inflation remains "modest." "As we see the activity level in manufacturing soften, that increases the possibility of further declines in prices," said Nobert Ore, chairman of the Institute's manufacturing survey.
Advance Retail Sales for May fell .5% versus estimates of a .2% decline and an upwardly revised 1.5% increase in April. Retail Sales Less Autos for May fell .2% versus estimates of a .2% increase and an upwardly revised 1.4% gain in April. Stripping out autos and gasoline, retail sales were unchanged after rising a vigorous 1.3% the prior month. "Retail sales soared in April, so a small cutback was not surprising," said Joel Naroff, president of Narof Economic Advisors. Consumer spending in the second quarter is projected to increase at a 3.2% pace, better than the 3.1% expected in a prior survey, according to the median forecast in a survey of 65 economists by Bloomberg. "Job growth and rising incomes have been and will continue to support growth in consumer spending overall," the Fed's Santomero said.
The Consumer Price Index for May fell .1% versus estimates of unchanged and a .5% increase in April. The CPI Ex Food & Energy for May rose .1% versus estimates of a .2% gain and an unchanged reading in April. Cheaper energy costs unexpectedly drove down consumer prices last month, the first decline since July 2004. The cost of all goods including cars, apparel and food fell .4% last month. "The economy has absorbed a surge of prices, mostly energy related, and things are simmering down," said Ken Mayland, president of ClearView Economics. The decline in prices may "cause the Fed to think it's reaching a neutral interest rate level and reaching the point where it can move to the sidelines," said Mayland.
Business Inventories for April rose .3% versus estimates of a .4% gain and a .5% increase in March. Inventories at US businesses rose .3% in April, the smallest increase this year, as sales surged. The increase in sales pushed the inventory-sales ratio down to 1.3 months, an all-time low. "If people are waiting for some kind of fallout from the consumer end of the economy, they'll have to wait a little longer," said Michael McNamara, vice president of research and analysis at MasterCard.
Empire Manufacturing for June rose to 11.7 versus estimates of 1.0 and a reading of -11.1 in May. The Empire Manufacturing Index rose by the largest amount since May 2003. The new orders component of the index rose to 8.2 from minus 8.2 a month earlier. The prices paid index fell to 30.6 from 41.6 in May. The index has "gone to a moderate growth reading after a very weak one in May," said Stephen Gallagher, chief US economist at Societe Generale.
Net Foreign Security Purchases for April rose to $47.4B versus estimates of $70.0B and $40.6B in March. International investors accumulated US assets at a slower-than-expected pace in April, amid evidence that hedge funds cut holdings of Treasuries. "Less hedge fund money is a good thing," said Joshua Shapiro, chief economist at Maria Fiorini Ramirez. Japan, the largest foreign holder of US government securities, bought a net 5.7 billion in April. "The overall level is not terribly relevant, since we know the dollar has strengthened significantly since April," Shapiro said.
Industrial Production for May rose .4% versus estimates of a .2% increase and a .3% decline in April. Capacity Utilization for May rose .4% versus estimates of a .2% increase and a .3% fall in April. US industrial production rose .4% in May, more than expected, helped by a rebound in demand for business equipment and consumer goods. Production of autos and parts increased 1.2% in May after a 2.3% decline in April. "The weakening in manufacturing has run its course," said James O'Sullivan, a senior economist at UBS Securities.
The NAHB Housing Market Index for June rose to 71 versus estimates of 71 and a reading of 70 in May. The gauge of US homebuilder optimism rose in June to the highest level this year as record home sales, mortgage rates below 6% and rising wages stoked demand. Mortgage rates near record lows and improving wages are supporting the housing market, even as soaring home prices and speculative purchases prompt concern from policy makers such as Fed Chairman Greenspan, Bloomberg said. "The favorable financing climate for new homes is proving too attractive for many buyers to pass up, so builders are staying very busy," said Dave Wilson, president of the homebuilding group.
Housing Starts for May rose to 2009K versus estimates of 2050K and 2005K in April. Building Permits for May fell to 2050K versus estimates of 2109K and 2148K in April. US housing starts rose .2% in May to the best pace since February as low interest rates and job growth continued to fuel demand. These numbers reinforce the view that this will be the best year for homebuilding since 1978 and the best year ever for home sales. Starts increased in all regions but the South, where they fell 12%. US home sales will top 8 million this year, the fifth consecutive record. "I would characterize it as robust activity in almost every market," said Richard Dugas, CEO of Pulte Homes. "This is an extremely strong reading," said Ken Mayland, president of ClearView Economics.
Initial Jobless Claims for last week rose to 333K versus estimates of 330K and 332K the prior week. Continuing Claims were 2641K versus estimates of 2587K and 2583K prior. The four-week moving-average of jobless claims rose to 335,000 from 332,250. Jobless claims fell to an average of about 328,000 this year from 343,000 for all of last year. The four-week moving-average of continuing claims rose to 2.597 million from 2.585 million. The insured unemployment rate rose to 2.1% in the week from 2% the week before. Employers have added jobs at a monthly rate of about 180,000 this year, compared with a monthly average of 183,000 for all of last year. The economy generated 2.2 million new jobs last year, the most in five years, Bloomberg said. "While we would like to see claims falling, the current level is low enough to be consistent with a continued, gradual tightening of the labor market," said Ian Shepherdson, chief US economist at High Frequency Economics.
Philly Fed. for June fell to -2.2 versus estimates of 10.0 and a reading of 7.3 in May. Manufacturing unexpectedly contracted in the Philly region for the first time in two years, Bloomberg reported. "The general picture is that manufacturing has been slowing," said David Sloan, chief economist at 4Cast.com. "The slowdown in the manufacturing sector is real but temporary," said Stephen Stanley, chief economist at RBS Greenwich.
The 1Q Current Account Balance widened to -$195.1B versus estimates of -$190.0B and -$188.4B in 4Q. Higher-priced oil and strong demand for goods from US consumers propelled the current account deficit higher. "The deficit is growing because US consumers are so enthusiastic," said Neil Wolfson, chief investment officer at Wilmington Trust. "They're going out and spending on plasma TVs and other electronics," and "that is translating into overseas sales," said Wolfson.
Preliminary Univ. of Mich. Consumer Confidence for June rose to 94.8 versus estimates of 88.8 and a reading of 86.9 in May. US consumer sentiment rose more than expected in June as the job market improved and gasoline prices eased in recent months. The index is the highest in five months and showed the biggest improvement since January 2004. The unemployment rate fell to 5.1% last month, the best level since September 2001. As well, the average price for a gallon of gasoline at the pump fell to $2.17 for the week ended June 13 from a record $2.32 in the week ended April 11. The current conditions component of the index, which reflects Americans’ perception of their financial situation and whether it’s a good time to buy big-ticket items, rose to 110.4 from 104.9 in May. The expectations component of the index jumped to 84.8 from 75.3 last month. This was the largest gain since the US economy began a significant acceleration in the first half of 2003.
BOTTOM LINE: Overall, last week's economic data were modestly positive. Consumer prices were up 2.8% for the 12 months ended in May, below the 40-year average of 3.0%. As I predicted at the beginning of the year, numerous measures of inflation are decelerating meaningfully. This is the main reason that long-term rates remain very low by historic standards. Globalization, immigration, lingering overcapacity from the 90s bubble, technological innovation, a firming US dollar and slowing global growth will keep inflation low for the foreseeable future. As well, foreign nations will likely boost US asset exposure over the coming months as the dollar continues to strengthen which should also help keep long-term rates low. US retail sales fell by a larger-than-expected .5% in May, however an average gain of .5% over the last three months paints a healthy picture of consumer spending. Rising incomes, a booming housing market, better sentiment, a rebound in stock prices and decelerating inflation should lead to a continuation of recent strong consumer trends. As well, I continue to believe a decline in energy prices during the second half of the year will further boost the consumer. While manufacturing appears to have stabilized after a recent slowdown, I do not expect a meaningful acceleration from current levels for a few more months. The US economy is significantly stronger than that of Europe and Japan, which is the main reason for the widening trade deficit. As well, high costs for imported oil are to blame. The budget deficit is already improving in a meaningful way. I expect the trade deficit to improve modestly during the second half of the year as energy prices decline. However, the relative strength of the US economy compared to that of most other industrialized nations will continue, thus preventing any meaningful improvement. I expect price appreciation in the national housing market to plateau soon at relatively high levels. I continue to believe the nation as a whole does not have to worry about a "housing bubble." The labor market is cooling from more vigorous levels, which should result in a deceleration in unit labor costs over the coming months. This is likely the Fed's main area of concern as almost every other measure of inflation is already decelerating. Finally, the ECRI Weekly Leading Index rose .98% to 134.10 and is forecasting moderately improving US economic activity. This index is now approaching cycle highs of 135.90 set in mid-March.
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