Weekly Economic Update

0) The CPI inflation number for January was flat, which was a bit less than the slight increase of +0.1% expected. However, the core inflation number—which excludes more volatile food and energy prices—gained +0.3% as opposed to an expected +0.2%. The difference was mainly due to an energy price decline in the headline figure, as well as marginal gains in apparel, tuition/child care and tobacco in the core number. Year-over-year, the headline inflation number was up +1.6% and core +1.9%. Similarly, the Producer Price Index for January rose +0.2% which was a tick below the expected +0.3% increase (and a year-over-year result of +1.4%). The core number rose by an identical amount, in line with expectations.

Overall, inflation results remain well-contained, if the CPI and PPI are used as one’s primary measures. Of course, if one uses one of the many ‘underground’ metrics available, such as one of several historical methodologies or lifestyle-based calculations, you might find a different number—but these are based on different rules and product mixes (one must also account for the technological differences implied in these assumptions). For example, our food might be cheaper, but many of us might argue cable TV, tuition and health care certainly aren’t. It’s hard to find a perfect measure here. But the differences do become important for retirees and future retirees if/when cost of living adjustments for Social Security benefits are tweaked and CPI starts to mean something. Then, those getting the benefits will begin to care about the calculation a lot. In that situation, retirees will naturally benefit from the highest (‘most realistic’) inflation number possible, while it will behoove the government (for program sustainability reasons) to keep these increases as low as possible, which may or may not track the actual inflation many of us experience on a day-to-day basis.

(+) The Conference Board’s Index of Leading Economic Indicators rose 0.2% in January to 94.1. This wasn’t as dramatic as December’s +0.5% jump, but it remains a gain, nonetheless. As the economists behind the index put it, the underlying results showed a continued trend of slow, but continued expansion—in the recent months, this was led by housing and financial results such as interest rate spread and stock prices. All-in-all, six of the ten indicators advanced, while consumer expectations for the future and new manufacturing orders were a negative influence. The ‘coincident’ indicators, which looks at variables that measure current conditions, were up +0.4%, while the ‘lagging’ index of backward-looking metrics rose the same amount. All point to positive movement, in line with an upward trend of the past six months.

(-) The Philadelphia Fed index underperformed for February, which added fuel to the fire for Thursday’s market drop. The resulting -12.5 point drop stood in stark contrast to an expected improvement of +1; however, the underlying components were not quite as bad as the index looked, with assessments of the general business climate coming in as worse than the orders, capital spending, shipments and employment metrics themselves. Additionally, there were some optimistic anecdotes for early 2013…

(+) Existing home sales rose +0.4% in January, which was better than the forecasted decline of -0.8%. Single-family sales were just slightly up, but condos (nearly +2% higher) were much more significant. The Northwest, Midwest and South gained, while the West fell almost -6%. When looked at from a multi-month moving average standpoint, this was the strongest existing home sales reading in three years.

(-) Housing starts fell in January by -8.5%, which was a disappointment compared to the expected drop of -3.6%. The bulk of the decline occurred in the multi-family category (-24%), which was too much to offset a +1% gain in single-family homes. On the positive side, December’s starts were revised upward by a few percentage points. For the year-over-year results, starts are up +20%, which represented a significant improvement and positive trend.

(+) Housing permits were up +1.8% on the month, which was a bit better than the forecast +1.2%. In this case, single- and multi-family were both up roughly evenly.

(-) The NAHB homebuilder index fell by a point to 46, which fell short of an expected 48 reading. In the underlying data, single family housing sales fell by a point, and prospective buyer traffic fell by 4. In general, this data can be a bit of a precursor to upcoming housing starts, but tends to be choppy month-to-month.

(-) Initial jobless claims rose to 362k, higher than the expected 355k for the Feb. 16 ending week. It appears seasonal adjustment factors may be contributing to the volatility of the weekly series so far this year, which is not unusual. Continuing claims for the Feb. 9 week came in at 3,148k, which was a touch lower than the 3,150k expected. However, the prior week’s claims were revised upward by 23k.

(+/-) We don’t normally put a lot of effort into a recap of the Fed Open Market Committee minutes, since these notes are often received with little fanfare, but the release on Wednesday led to a relatively sharp equity market selloff. The catalyst was mention of a significant discussion about the risks of QE (in relation to the benefits), and potential timing and factors that would prompt an exit from the program. As expected, several members appeared to be more inflation-sensitive, while others remained fearful of removing accommodation too soon. Note the difference between all members (various regional Fed presidents) and voting members (a more condensed and influential group)—the latter of which have largely been in favor of keeping QE intact.


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