Inflation Decelerates, NY Manufacturing Bounces, Industrial Production Falls, Capacity Utilization Lower, Confidence Improves

- The Consumer Price Index for August rose .2% versus estimates of a .2% increase and a .4% gain in July.
- The CPI Ex Food & Energy for August rose .2% versus estimates of a .2% gain and a .2% increase in July.
- Empire Manufacturing for September rose to 13.8 versus estimates of 13.5 and a reading of 11.0 in August.
- Industrial Production for August fell .1% versus estimates of a .2% decline and a .4% rise in July.
- Capacity Utilization for August declined to 82.4% versus estimates of 82.5% and a reading of 82.7% in July.
- Univ. of Mich. Consumer Confidence for September rose to 84.4 versus estimates of 84.0 and a reading of 82.0 in August.

BOTTOM LINE: Prices paid by US consumers rose in August at half the pace of the previous month, pointing to slower inflation as predicted by Fed Chairman Bernanke. Energy prices rose .3% in August versus a 2.9% increase in July. Gasoline prices increased .2% versus a 5.3% gain in July. Airline fares fell 1.9%, the largest decline since December. The recent substantial decline in energy prices should lead to an even better CPI next month. I continue to believe inflation fears have peaked for this cycle as the mania for commodities continues to reverse course and unit labor cost increases remain subdued.

Manufacturing in NY state expanded at a faster pace this morning as shipments rose and order backlogs increased, Bloomberg reported. The prices paid component of the index fell to 41 versus a reading of 44.3 in August. The employment component of the index rose to 12.5 versus a reading of 6.5 the prior month. A plunge in energy prices may cut manufacturing costs further and keeping factories humming. The average price of a gallon of regular grade gasoline has fallen from $2.95 in August to $2.67 this month. I continue to believe manufacturing will remain relatively healthy over the intermediate-term as companies rebuild depleted inventories as they gain confidence in the sustainability of the current expansion.

Industrial production in the US unexpectedly fell in August, led by a decline in utility use and mining, Bloomberg said. A return to more normal temperatures after July’s heat wave, helped curtail utility production. Mine production, which includes oil, gas and minerals fell last month versus a .6% gain in July. Business equipment production surged 13.5% from year ago levels. Industrial Production should continue to decelerate modestly over the intermediate-term. Capacity Utilization will likely trend around average levels.

Confidence among US consumers this month rose for the fist time since June, helped by declining gasoline prices and strength in the labor market, Bloomberg reported. The expectations component of the index surged to 77.1, the best since January, versus a reading of 68 the prior month. Consumers said they expect inflation to rise 3.1% over the next 12 months versus expectations of a 3.8% increase the prior month. Consumer confidence should continue to improve meaningfully over the intermediate-term as energy prices continue to fall, inflation decelerates, interest rates remain low, stocks rise, housing stabilizes, the job market remains healthy and irrational pessimism lifts.