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Economic Week in Review: Price declines bolster the Fed's case

May 17, 2013

The Federal Reserve's bond-buying programs and ultralow interest rates have had the aim of driving down borrowing costs to kickstart the economy. While even some members of the Fed have argued this may fuel inflation, there was little sign of that happening in the reports out this week. Consumer and producer prices actually fell in April, owing in good part to a drop in energy prices, especially for gasoline. At the same time, manufacturing showed some slippage and weekly unemployment claims (a volatile statistic) rose more than expected.

The Standard & Poor's 500 Index ended the week of May 17, 2013 at another new high. It was up 2.0% for the week to 1,666 (for a year-to-date total return—including price change plus dividends—of about 18%). The yield on the 10-year U.S. Treasury note rose 5 basis points to 1.95% (for a year-to-date increase of 17 basis points).

Retail sales strongest since December; year-on-year growth less impressive

April retail sales were up 0.1%, led by strength in building supply stores, nonstore retailers, apparel stores, and auto dealers. Sales were up 0.7%, the strongest performance since December 2012. Year-over-year retail sales growth, however, is up only 3.7%, the third-lowest rise since 2009. Energy and food prices fell substantially in April, leaving consumers with more cash for discretionary spending.

Retail sales

Producer prices drop more than expected

In April, producer prices experienced their steepest decline since February 2010, tumbling 0.7%. Wholesale prices rose only 0.7% year over year, the smallest increase since last July. While finished energy goods were down 2.5%, finished consumer food prices fell 0.8%—the steepest drop in two years. Excluding food and energy, prices had been on the increase, rising a modest 0.2% in December, January, February, and March, but they slowed to 0.1% in April.

Consumer prices also fell

The Consumer Price Index, used to measure change in the cost of living, told a similar story as the other price-related reports out this week: it declined by 0.4% compared to a month earlier. While the energy component slumped 4.3%, that figure masks an increase in natural gas and electricity prices that was more than offset by an 8.1% drop in gasoline prices. Stripping out both energy and food, which tend to swing widely from month to month, the reading for consumer prices was +0.1% for the month and 1.7% over the year.

Homebuilding moves higher in fits and starts

While the longer-term trend in homebuilding is clearly upward, volatile monthly figures have been the norm of late. Housing starts in April missed expectations by dropping 16.5% to 853,000 annualized units, erasing about six months of gains. On a more positive note, the latest report showed that single- and multi-family housing starts in April were up 13.1% compared with a year earlier. Furthermore, building permits for privately owned houses, which give some indication of the level of confidence among homebuilders, rose 14.3% from their level in March and 35.8% compared with April 2012.

Industrial production declines

Output at factories, mines, and utilities fell 0.5% in April, more than expected, partly because of the continuing recession in Europe and slower growth in China. February and March figures were also revised downward; January and February figures were revised upward. Motor vehicle and parts production was down 1.3% in April; other manufacturing slid 0.3%. Production of consumer goods, business equipment, construction, and supplies and materials also fell.

"Expectations for growth in the private sector were low, as the cloud of uncertainty surrounding fiscal policy remains thick," said Vanguard economist Andrew J. Patterson. "Until a clearer policy picture emerges, sentiment and confidence are likely to weigh on growth."

Inventories hold steady, falling short of expectations

Business inventories were flat in March, evidence that companies remain cautious about overstocking their shelves. Economists had expected a 0.3% increase. While wholesale inventories were up 0.4%, retail inventories slid 0.5% after a 0.2% increase in February, led by declines in furniture, appliance, clothing, and electronics goods on hand.

Leading indicator turns positive

The Conference Board's index of leading indicators resumed its recent trend upward by rising 0.6% in April following a 0.2% decline in the previous month. Of the ten components which make up the index, seven advanced. Notable improvements were seen in housing permits and labor market conditions. However, consumers' expectations for the economy continued to deteriorate. Factors likely contributing to their glum mood were the effects of the automatic federal spending cuts known as the sequester, as well as the payroll tax increase which took place at the beginning of the year.

The economic week ahead

Economic reports due out next week include existing home sales on Wednesday, new home sales on Thursday, and durable goods orders on Friday. On Wednesday, the Federal Reserve will release the minutes of its latest policy-making committee meeting.

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
May 13 Retail Sales (April)
Source: Commerce Department
+0.1% –0.3% +2 bp 0.0%
  Business Inventories (March)
Source: Commerce Department
0.0% +0.3%    
May 14       +4 bp +1.0%
May 15 Producer Price Index (April)
Source: Labor Department
–0.7% –0.5% –2 bp +0.5%
  PPI, except food and energy (April)
Source: Labor Department
+0.1% +0.2%    
  Industrial Production (April)
Source: Federal Reserve Board
–0.5% –0.2%    
May 16 Initial Jobless Claims (week ended May 11)
Source: Labor Department
360,000 330,000 –7 bp –0.5%
  Consumer Price Index (April)
Source: Labor Department
–0.4% –0.2%    
  CPI, except food and energy (April)
Source: Labor Department
+0.1% +0.2%    
  New Residential Construction (April, annualized)
Source: Commerce Department
853,000 973,000    
May 17 Leading Economic Indicators (April)
Source: The Conference Board
+0.6% +0.1% +8 bp +0.9%
      Weekly change +5 bp +2%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5.0% to 5.5%, the increase is 50 basis points.

Notes

  • The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read Guide to major U.S. economic reports.
  • All investing is subject to risk, including possible loss of the money you invest.
  • Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
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