Tuesday, June 17, 2008

PPI Accelerates, Housing Starts Decline, Industrial Production Declines, Capacity Utilization Falls

- The Current Account Deficit for 1Q widened to -$176.4 billion versus estimates of -$172.5 billion and -$167.2 billion in 4Q.

- The Producer Price Index for May rose 1.4% versus estimates of a 1.0% increase and a .2% gain in April.

- The PPI Ex Food & Energy for May rose .2% versus estimates of a .2% increase and a .4% gain in April.

- Housing Starts for May fell to 975K versus estimates of 980K and 1008K in April.

- Building Permits for May fell to 969K versus estimates of 960K and 982K in April.

- Industrial Production for May fell .2% versus estimates of a .1% gain and a .7% decline in April.

- Capacity Utilization for May fell to 79.4% versus estimates of 79.7% and 79.6% in April.

BOTTOM LINE: Prices paid to US producers rose more than forecast in May as fuel and food costs climbed, Bloomberg reported. The PPI is rising at a 7.2% rate year-over-year versus the 20-year average of 2.4%. This is also up from a 6.9% rate in September 2005. Core prices rose 3.0% year-over-year versus the 20-year average of 1.8%. This is also up from a 2.9% rate in July 2005. Producers paid 9.3% more for gasoline, the biggest increase since November, and diesel fuel costs jumped 11.2%. Natural gas prices rose 5.7% for the prior month. Passenger car prices fell 1% and light truck prices dropped .9%. Capital equipment costs rose .1%. “Thus far, the pass-through of high raw materials costs to the prices of most other products and to domestic labor costs has been limited, in part because of softening domestic demand,” Fed Chairman Bernanke recently said. The 10-year TIPS spread, a good gauge of long-term inflation expectations, is down 4 basis points today to 2.52%. This is down 16 basis points from a 52-week high of 2.68% on March 13th. I still believe inflation fears have peaked and gauges will show a meaningful deceleration later this year. All that is separating us from talk of disinflation is a bursting of the current commodity bubble.

Builders in the US broke ground in May on the fewest houses in 17 years, Bloomberg reported. Housing starts were down 32% from May 2007. Residential construction has subtracted from overall US growth since the first quarter of 2006. Builders have cut 208,000 workers so far this year. While home construction may improve gradually in the second half of the year, starts will remain muted over the intermediate-term as homebuilders reduce inventory.

Industrial production in the US unexpectedly fell in May as shrinking output by utilities and consumer-goods makers overshadowed a gain in auto manufacturing, Bloomberg reported. Capacity utilization fell to the lowest level since September 2005, when hurricanes disrupted manufacturing and oil production in the Gulf. Production of motor vehicles and parts rose 1%, the first gain since November. The resolution of the three-month strike by GM’s largest axle supplier helped lift auto output. GM plans to return to full production this month. The walkout, which ended May 26, stopped production of about 330,000 units, and cost GM $2.6 billion. Utilities output fell 1.8% in May. Milder-than-average temperatures last month limited utility use. The average temperature in May in the US was .7 degrees below the historical average, according to the National Climatic Data Center. I expect industrial production to accelerate over the coming months on warmer weather, inventory rebuilding, accelerating auto production and rising demand. The 10-year yield is down 6 basis points and the US Dollar Index is rising .02% on today’s reports. Fed fund futures indicate an 86.0% chance of no change and a 14.0% chance for a 25 basis point hike at the upcoming June 25 FOMC meeting.

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