Thursday, December 15, 2005

Consumer Prices Fall Most in 50 Years, Manufacturing Remains Healthy, Labor Market Still Strong, Foreign Demand for US Assets Hits Another Record

- The Consumer Price Index for November fell .6% versus estimates of a .4% decline and a .2% increase in October.
- The CPI Ex Food & Energy for November rose .2% versus estimates of a .2% increase and a .2% gain in October.
- Empire Manufacturing for December rose to 28.7 versus estimates of 18.2 and a reading of 22.8 in November.
- Initial Jobless Claims for last week rose to 329K versus estimates of 320K and 328K the prior week.
- Continuing Claims fell to 2606K versus estimates of 2626K and 2585K prior.
- Net Foreign Security Purchases for October rose to $106.8 billion versus estimates of $75.0 billion and $101.7 billion in September.
- Industrial Production for November rose .7% versus estimates of a .5% gain and an upwardly revised 1.3% gain in October.
- Capacity Utilization for November rose to 80.2% versus estimates of 79.8% and a reading of 79.8% in October.
- The Philly Fed for December fell to 12.6 versus estimates of 15.0 and a reading of 11.5 in November.
BOTTOM LINE: A record decline in energy costs last month drove the US consumer price index down .6%, the biggest drop in more than 50 years, Bloomberg said. Gasoline prices declined 16% in November, the most in US history. The average price of gas has continued falling in December, dropping from $2.30/gallon to $2.21/gallon. The cost of all goods including cars, apparel and food fell 2.2% last month versus a .5% decline the prior month. I continue to believe measures of inflation will decelerate most of next year as commodity prices weaken and unit labor costs remain subdued.

Manufacturing in New York state expanded at the fastest pace in 17 months in December as costs declined and demand rose, Bloomberg reported. The new orders component of the index rose to 30.2 from 25.9 in November. I continue to believe manufacturing will add to US economic growth over the intermediate-term as companies rebuild inventories from depleted levels and confidence improves.

The number of Americans filing first-time unemployment benefit claims rose by 1,000 last week, remaining at a level that shows companies are holding on to workers to meet strong demand, Bloomberg reported. The four-week moving-average of claims increased to 328,750 from 322,750 the prior week. The unemployment rate among those able to receive benefits, which follows the US unemployment rate, held steady at 2.0%. I continue to expect the US labor market to remain healthy. However, it is unlikely that enough tightness will occur as to generate a substantial increase in unit labor costs, the largest component of inflation.

International investors increased their net holdings of US assets in October at a historic pace as strong growth lured funds to the world’s largest economy. The US economy grew at more than twice the pace of Europe last quarter. I continue to expect foreign demand for US assets to remain near record levels as US growth outpaces that of other developed nations, the dollar remains firm and commodity prices fall.

US industrial production rose in November for a second month, as companies increased inventories and manufacturing and energy production recovered from the Gulf Coast hurricanes. At 80.2, capacity utilization is well below average levels for this point in the economic cycle. This is a result of the massive overcapacity generated during the late 90s.

Manufacturing in the Philadelphia area expanded more quickly this month, adding to evidence of strength in US industry as companies rebuild inventories and invest in new equipment, Bloomberg reported. The prices paid component of the index fell to 49.0 from 56.8 in November. This large drop in the prices paid component is a big positive and should provide the Fed with another reason to “pause” over the coming months.

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