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Overall, the economic news last week was balanced. In this Monday Update, I’ll review the good and the bad, as well as what to watch for in the week ahead.
Last week’s important releases
Consumer prices data. Just as the Fed had worried about, headline prices (including food and energy) dropped for the second month in a row, down by an additional 0.2 percent, bringing the annual inflation rate to 0 percent (or almost into deflation). This drop, however, was due entirely to a massive 9-percent decline in gasoline prices.
On the other hand, core inflation, which excludes food and energy costs, ticked up by 0.2 percent to 1.9 percent for the year, above the expected 1.8-percent increase. This number is moving even closer to the Fed’s target zone. As I wrote last Friday, the headline numbers are worrying, but the core numbers are, in fact, better indicators of economic risk: These indicate deflation is not really a risk.
Retail sales. Here, the numbers were disappointing, with a 0.1-percent increase, which was below the expected 0.2-percent increase. Even worse, the previous month was revised downward from 0.2 percent to 0 percent. Although sales were affected by declining gasoline prices, even the control retail sales figure—excluding autos, gas, and building materials—decreased by 0.1 percent. This number was down from the prior month’s figure of 0.2 percent, which itself was revised down from an increase of 0.4 percent.
Industrial production. Although retail sales disappointed, industrial production was somewhat better than expected—although still not particularly good. Industrial production declined by an additional 0.2 percent, as expected, after a drop of 0.4 percent in the previous month. Interestingly, though, the previous month’s drop was revised up to a decline of 0.1 percent. This suggests that the strong dollar and weak commodity prices continue to weigh on this sector, but there are signs of stabilization.
Consumer confidence. Finally, on Friday, the University of Michigan’s Consumer Confidence Survey rebounded much stronger than expected, increasing to 92.1 from the previous month’s 87.2 and well above expectations of 89. This rebound is consistent with other confidence indicators, and it hopefully suggests that the poor retail sales figures are an outlier.
Overall, poor retail sales were offset by the surprisingly good consumer confidence figure, and the lower decline and upward revisions of industrial production suggest those sectors are stabilizing. Inflation, which superficially remains in the worry zone, is much less concerning under the surface. There are signs of slowing in the data, but any such slowing looks likely to be modest and probably short-lived.
What to watch in the week ahead
This week’s data releases are all about the housing market. The National Association of Home Builders (NAHB) U.S. Housing Index was released today, with a surprise increase to 64 from the previous month’s level of 62. This was at the high end of expectations and is the highest level since 2005. Tuesday, the housing starts number will be released, which is expected to increase to approximately 1.2 million from the previous month’s 1.126 million. The high NAHB index suggests that number could be even stronger. Finally, existing home sales will be released on Thursday and are expected to decrease slightly from 5.31 million in September. Given a relatively low level of inventory, this will not necessarily reflect a reduction in demand.
