Monday Update: Inflation a Bit High, Consumers Earning and Spending

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 17, 2018 3:11:09 PM

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Monday updateLast week was a busy one on the economic front, starting with prices. This week will also be active, with several reports on housing, a look at durable goods demand, and the consumer income and spending report.

Last week’s news

On Tuesday, the producer prices report was released. The headline index, which includes energy and food, rose by 0.1 percent for November. This result was above expectations for a flat result but down from a 0.6-percent increase in October, on declines in gasoline and commodity prices. The annual change dropped as expected, to 2.5 percent from 2.9 percent, indicating that longer-term inflation pressures remain elevated above the Fed’s target range but may be moderating. The core index, which excludes energy and food, rose by 0.3 percent for November. This result was above expectations for 0.1-percent growth but down from 0.5 percent for October. Here, the annual figure ticked up from 2.6 percent to 2.7 percent. This is a better indicator of overall inflation risk and suggests inflationary pressures continue and will remain a factor in Fed policy.

On Wednesday, the consumer price reports showed moderating inflation at the headline level. The headline index, which again includes food and energy, stayed flat for November, as expected. This result was down from an increase of 0.3 percent in October, on a decrease in gasoline costs. The annual figure also dropped as expected, to 2.2 percent in November from 2.5 percent in October. The core index, excluding food and energy, performed as anticipated. It remained steady at 0.2-percent growth for November, the same as October, while the annual figure ticked up from 2.1 percent to 2.2 percent. These figures indicate inflation continues to run somewhat above the Fed’s target levels but that the gap remains small.

On Friday, the retail sales report showed slower growth, after a substantial rebound in October. It came in at 0.2 percent for November, down from a 0.8-percent gain in October, as gas sales decreased with prices and hurricane-driven replacement auto sales subsided. This was still better than the expected growth. Core retail sales, which exclude autos and gas and are a better economic indicator, did better. Here, November growth came in at 0.5 percent, plus there was an upward revision to the October growth figure from 0.3 percent to 0.7 percent. These growth figures remain positive and suggest that consumption growth, the largest part of the economy, remains strong.

The industrial production report, also on Friday, was more mixed. While growth for November came in stronger than expected, at 0.6 percent compared with 0.3 percent, much of this was due to a rise in utility output due to cold weather. October growth was revised down from 0.1 percent to a decline of 0.2 percent. Although some of this variance is like due to the lingering effects from Hurricane Michael, manufacturing also disappointed. Manufacturing growth was flat for November, while growth for October was revised down from the initial 0.3 percent to a 0.1-percent drop, as the dollar continues to rise. These numbers are not an immediate concern but do suggest industrial growth may be slowing.

What to look forward to

On Monday, the National Association of Home Builders survey showed another unexpected drop, going to 56 for December. This result was worse than a small expected increase to 61 and down from 60 in November, which itself was a surprise drop from 68 in October. This suggests that the housing market may well continue to weaken.

The housing starts report will be released on Tuesday. It is expected to stay steady at 1.23 million annualized, after a small increase last month. A decline in building permit data, however, suggests the final result might be somewhat worse than expected.

On Wednesday, the existing home sales report is also expected to show sales decreasing slightly. They should go from 5.22 million in October to 5.20 million in November. Housing in general appears to be in a slowing trend, but this data would suggest that slowing is steady rather than accelerating.

Also on Wednesday, the Federal Reserve Open Market Committee will conclude its regular meeting with a press conference. Markets expect the Fed to raise its baseline rate by 25 basis points once more. But the real focus will be on what Chair Powell indicates about the pace of rate increases in 2019. With recent assumptions that the Fed is becoming more dovish, markets will be watching closely.

On Friday, we’ll see the durable goods orders report. The headline index is expected to rebound substantially from last month, from a 4.3-percent decline in October to a gain of 2 percent in November, on an increase in aircraft orders. This headline index is notoriously volatile, as we can see. The core index, which excludes transportation and is a much better economic indicator, is expected to improve from 0.2-percent growth in October to 0.3-percent growth in November, on steady growth in business investment. This would be a healthy level of growth, although there may be some upside risk here as industry surveys improved in November.

Finally, also on Friday, the personal income and spending report will be released. It is expected to show that personal income rose by 0.3 percent in November, down from 0.5-percent growth in October, on slower job and labor demand growth. Personal spending growth is expected to decline from 0.6 percent in October to 0.3 percent in November, on a decline in gasoline prices, which will offset rising retail sales. This would remain a healthy level of spending growth and would be well supported by the income growth.

Thanks for reading and have a great week!

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