Consumer Price Index – FOMC Has Evidence to Modify Rhetoric
The FOMC has been speaking tough on inflation for a long time, the minutes of the October meeting also included remarks of concern about inflation. This has been justifiable given the upward trend of core inflation. Data from the October report on consumer prices offers sufficient evidence to modify this rhetoric. The overall Consumer Price Index (CPI) fell 0.5% during October, after a similar decline in the prior month. This is largely due to lower energy prices (-7.0%). On a year-to-year basis, the CPI is up only 1.3% in October vs. a high of a 4.3% increase in June 2006. And, the core CPI rose 0.1% in October, putting the year-to-year increase at 2.7%, down 20 basis points from September. The moderation in the core CPI is the most important information from this report that will allow the Fed to soften the verbal battle against inflation. The December policy statement could be the first available opportunity to indicate that growth in the inflation-growth debate is gaining momentum, assuming the November employment report will lean toward soft demand for labor.
The other highlights from the October CPI report are: The food price index rose 0.3%, shelter costs moved up 0.3%, the price index for core commodities dropped 0.3%, and the services less energy services price index increase 0.3%. Within shelter costs, the index of rent and owner’s equivalent rent increased 0.4% in October. The year-to-year gain in the shelter cost index has dropped to a 4.03% increase compared with a recent high of a 4.23% jump. Gasoline prices fell 11.1%, prices of new and used cars declined 0.1% and 0.2%, respectively, airfares fell 1.4%, and apparel costs dropped 0.7%.
Weak Factory Production Data Supports Expectations of A Lower Federal Funds Rate
Industrial production increased 0.2% in October after a 0.6% drop in September. The direction of change in September and October is tied to activity at the nation’s utilities. In September, production of utilities fell 4.6% followed by a 4.1% increase in October. Mining activity has risen 0.4% and 0.6% in September and October, respectively. Stripping out utilities and mining, we are left with 85.0% of the activity at the nation’s factories termed as “manufacturing output.” Factory or manufacturing production has declined 0.2% in October, after a similar decline in September. This is main part of the industrial production report and it the two consecutive monthly declines are noteworthy. On a year-to-year basis, factory production probably peaked in September.
Capacity utilization in the factory sector declined to 80.7% in October, following a 81.0% mark in the prior month. The September reading of 81.4% is probably the peak for the current cycle.
The Federal Reserve Bank of Philadelphia’s factory survey results for November present a mixed bag of evidence. The general business activity index rose to 5.0 in November vs. a minus 0.7 in October. But, the new orders index fell 17 points to minus 3.7 and the employment index declined to 0.2 from 9.4 in October.
Jobless Claims -- Soft Labor Market Signal Appears Again
Initial jobless claims dropped to 308,000 during the week ended November 11. The Veterans day holiday may distorted the weekly count of initial jobless claims. The year-to-year change in seasonally unadjusted initial jobless claims rose to 0.3% after a 3.9% drop in the prior week and 2.4% increase two weeks ago. This trend toward positive readings is a sign of soft demand for labor. Continuing claims were unchanged and the insured unemployment rate held at 1.9%.
Housing Market Index Recovers Small Part of Huge Decline
The Housing Market Index (HMI) of the National Association of Home Builders increased to 33.0 in November after establishing a low of 30.0 in September. The two consecutive monthly improvements are insignificant because the index has dropped from a high of 72.0 in June 2005. Additional large gains will be necessary for a meaningful recovery. Housing starts data for October will be published on November 17.
