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US economic indicators

PPI and CPI surge on energy in June, core rates remain moderate

Mon, Jul 14 2008, 12:06 GMT
by BHF-Bank Economics Department

BHF-Bank

• Tax rebates keep boosting retail sales, drop in auto sales curbs increase

• Industrial production remained unchanged at best, manufacturing activity slows

• Mr. Bernanke testifies before Congress, will signal no intention to change rates soon
  

Energy prices kept rising strongly in June, albeit at a less frantic pace than in the months before. However, as the PPI seems to reflect movements in commodity prices with a time lag, we expect overall producer prices to rise roughly at the same rate as in May, by 1.5 % mom. The annual rate would accelerate from 7.2 to 8.7%. In contrast, we expect core PPI (ex food and energy) to rise 0.3% mom, slightly faster than in May, but still in line with the trend. Consumer prices, due on Wednesday, are likely to follow a similar pattern: We expect core CPI to increase by a moderate 0.2% mom, with the annual rate steady at 2.3%, whereas overall CPI is likely to rise 0.6% mom (4.4% yoy), mainly driven by energy prices.

Retail sales probably strengthened in June. Firstly, because rising gasoline prices boosted nominal sales at filling stations, secondly, because households have spent their tax rebate without delay. However, domestic vehicle sales have been extremely weak, dropping nearly 5% mom to 9.9 mn units. Therefore, total sales probably rose only 0.3 % mom, whereas sales less autos might have soared about 1%.

The Empire State Manufacturing index dropped 5.5 index points to –8.7 in June, indicating a significant contraction of manufacturing activity in the New York region. Likewise, the Philly Fed Index fell by 1.5 points to –17.1. We expect both regional surveys to show a small further decline in July, to – 9.5 and –18.0, respectively.

Industrial production dropped 0.7% mom in April and fell another 0.2% in May. Indications for June are somewhat inconclusive: On the one hand, the production component of the manufacturing ISM improved slightly to 51.5, suggesting expanding production. On the other hand, the index of aggregate working hours in the manufacturing sector kept declining. Moreover, the Midwest floodings might have hampered industrial activity to some extent. We therefore suspect that manufacturing production eased slightly in June. As output from utilities probably rose, we expect overall industrial production broadly unchanged in June. Capacity utilization should have been stable at 79.4%.

On Wednesday, Federal Reserve Chairman Ben Bernanke will present the semiannual Monetary Policy Report to the Senate Banking Committee. As usual, another appearance is scheduled for the following day at the House Financial Services Committee. Mr. Bernanke can be expected to stick basically to the position outlined in the FOMC Statement from June 25: He is likely to express strong concern with respect to inflation risks, stemming from rising food and commodity prices and exacerbated by the dollar weakness. However, we do not expect the Fed to make significant changes to its forecast for the core PCE deflator, put at 2.2 to 2.4% yoy in Q4 2008 and 1.9 to 2.1% in Q4 2009 in April. With respect to growth, the Fed is likely to point out that, as a result of monetary policy and fiscal measures, the risk of a “negative feedback loop” has decreased. Due to robust private consumption and external demand, GDP growth in Q2 and also in Q3 could turn out somewhat stronger than previously expected. As a result, the Fed will possibly raise the growth forecast for Q4 2008. At the same time, the period of economic weakness will probably be more protracted than previously thought: The housing market is still shrinking; home sales, house prices, and construction as yet show no signs of stabilizing. Surging energy and food prices reduce the purchasing power of households and erode the confidence of consumers already hit hard by the housing crisis. The growth forecast for Q4 2009 could therefore be revised downwards. Moreover, financial markets in general and the banking system still appear vulnerable and heavily dependent on support from the Fed and other state institutions. Against this background, Mr. Bernanke is likely to signal no intention to tighten monetary policy for the time being.

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Published on  Tue, Jul 15 2008, 10:22 GMT

Archive

• ISM indices (August): showing contraction again
  Published On Mon, Sep 1 2008, 09:22 GMT
• PCE core deflator (July): well above the Fed's comfort zone
  Published On Mon, Aug 25 2008, 08:54 GMT
• Leading indicators (July): a more marked decline than in June
  Published On Mon, Aug 18 2008, 08:54 GMT
• Industrial production (July): slower than June
  Published On Mon, Aug 11 2008, 11:28 GMT
• PCE core deflator (June): slightly higher, above the Fed's comfort zone
  Published On Tue, Aug 5 2008, 07:18 GMT

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