PPI Decelerates, Retail Sales Fall, NY Manufacturing Still Expanding, Business Inventories Hit New Record Low

- The Producer Price Index for December fell .1% versus estimates of a .2% rise and a 3.2% gain in November.

- The PPI Ex Food & Energy for December rose .2% versus estimates of a .2% gain and a .4% rise in November.

- Advance Retail Sales for December fell .4% versus estimates of unch. and a downwardly revised 1.0% increase in November.

- Retail Sales Less Autos for December fell .4% versus estimates of a .1% decline and a downwardly revised 1.7% gain in November.

- Empire Manufacturing for January fell to 9.0 versus estimates of 10.0 and 9.8 in December.

- Business Inventories for November rose .4% versus estimates of a .4% increase and a .1% gain in October.

BOTTOM LINE: Prices paid to US producers unexpectedly fell in December, pushed down by a decline in energy prices, Bloomberg reported. Core producer prices rose 2.0% for all of 2007, the same as the prior year. Energy costs fell 1.9% versus a 14% rise the prior month. Prices of gasoline fell 4.8% and diesel fuel costs dropped 3%. Costs of intermediate goods, such as steel used in earlier production stages, fell .2% versus a 3.7% increase the prior month. The 10-year TIPS spread, which is a good gauge of inflation expectations, is falling another basis point today to 2.24%, right near a multi-year low. I continue to believe inflation fears have peaked for this cycle and that inflation will continue to decelerate over the intermediate-term. The secular trend of disinflation remains firmly in tact, in my opinion.

Sales at US retailers unexpectedly fell in December, Bloomberg reported. For all of 2007, retail sales rose 4.2%. The drop in sales for the month was led by a 2.9% decline at building-material stores. Purchases at service stations fell 1.7%, reflecting lower gasoline prices. Excluding autos, gasoline and building materials, the figure the government uses to compute GDP, sales rose .1% for December. An early Thanksgiving boosted holiday shopping in November at the expense of December sales, economists said. As well, gift cards bought over the last two months won’t be reflected in the sales figures until they are redeemed this month or next. I expect retail sales to bounce back in January.

Inventories at US businesses increased as forecast in November, Bloomberg said. Sales rose 1.6%, the most since March of last year. The amount of inventory on hand fell to 1.24 months’ supply, the lowest in US history.

Manufacturing in NY state slowed slightly in January, Bloomberg reported. The Unfilled Orders component of the index rose to 1.2 from -10.0 the prior month. The Employment component fell to 2.4 from 5 the prior month. The Shipments component fell to 15.8 from 20.4 the prior month. The Inventories component rose to -4.9 from -10.0 the prior month. The Prices Paid component rose to 40.2 from 35 the prior month. I still expect manufacturing to help boost overall US economic growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories as a result of record exports.