Weekly Economic Update

(+) Retail sales for July rose for the fourth consecutive month, with a gain of +0.2%, which came in slightly below the forecasted +0.3%.  While broadly stronger, the tempered headline result was based on a -1% decline in autos and auto parts sales.  However, the more closely-watched ‘core’ number (removing auto-related items, gasoline and building materials) outperformed, gaining a tick better than forecast at +0.5%.  Gains here were broad across a variety of categories, including restaurant meals/beverages with a particularly large increase, while electronics represented the only losing category group.  While not large increases month-to-month, this indicator has served as a bright spot in recent months in terms of improved consumer behavior, as cash savings and paydowns of debt wane in line with generally improving conditions.

(-) The August Philadelphia Fed index reported results that were a little worse than expected, at +9.3 versus a +19.8 July level and an anticipated +15.0 this month.  The details below the surface were also weaker, in the areas of shipments, new orders and employee additions.  On the positive side, the level remained above zero, which pointed to expansion in the segment as opposed to contraction.

(-) Similarly, the New York Empire manufacturing index for August also disappointed, coming at a level of +8.2 versus the +9.5 July report and a forecast of +10.0.  The underlying data was more mixed than that of the Philly survey, with new orders and shipments down, but employment and the average workweek improving somewhat.  Capital expenditure expectations also improved for the six-month look-ahead period, which is a positive.

(+) Import prices in July broke a string of four straight declines by rising +0.2% for the month, but stopped short of the forecasted +0.8%.  Higher petroleum prices (up +3%) were the primary factor, as the non-petroleum component of the report fell by roughly half a percent.  Lower import price levels from Japan and China were noted specifically; the weaker Yen not being a particular surprise due to the efforts of the Japanese government to encourage this very thing.

(0) The producer price index came in unchanged for July, which undershot the expected +0.3% increase.  Core PPI, which excludes food and energy, rose +0.05%, which itself came below expectations of +0.2%.  Intermediate goods and finished goods for the month were unchanged as well on a net basis; the much of the increase in prices of food and energy were offset by weakness in other goods.

(0) Similarly sedate, the consumer price index gained +0.2% on a headline level (+2.0% year-over-year), which was on target with forecast.  Removing food and energy, the core CPI figure rose +0.15%, which was slightly below the +0.2% expected, and brought the trailing 12-month core inflation number to +1.7%.  In the underlying data, residential rents rose +0.2% in keeping with the same pace of the last few months, while a few ‘outliers’ consisted of tobacco and apparel prices moving at a faster rate than CPI.  At the same time, personal computer prices declined.

From the combination of measures, inflationary pressures continue to be quite low—at least based on standard government measures.  It seems at least some retirees may have a potential beef with the official CPI calculation based on the composition of their own expenses compared to the (usually lower) rate of increase in CPI-based social security income.  So, we have a site for you (http://www.shadowstats.com/alternate_data/inflation-charts) that compares current methodologies used relative to those employed in the past.  For the sake of space, we won’t delve into the intricacies of ‘hedonic’ and other adjustments, but some of the detail may make for an interesting read and/or client conversation.  The conclusion is that many retirees may need more of a nest-egg than they initially realized.

(-) Industrial production was flat in July, versus expected growth of +0.3%.  As a component, manufacturing production lost ground by a tenth of a percent, while materials production bucked the trend with a small rise.  The capacity utilization level was reported at 77.6%, which fell short of the forecasted 77.9%.  Unit labor costs, which measures compensation relative to productivity, gained +1.4%.  Nonfarm productivity rose +0.9% for the 2nd quarter, which surpassed a forecast of +0.6%, but the first quarter’s growth level was revised downward from +0.5% to -1.7%, along with other recent GDP revisions.  The net effect over the past year is zero productivity growth.  Productivity is an interesting concept, with several difficult-to-measure components—we may discuss at more length another day.

(+) In housing, the NAHB homebuilder sentiment index rose for the fourth consecutive month to 59 for August, beating expectations by two points.  Within the index, builder assessments of present sales improved by several points, as did future sales expectations, while prospective buyer traffic was unchanged.

(-) Housing starts rose +5.9% in July (to an annualized 896k units), but came in short of expectations calling for a +7.7% gain.  The month’s increase brought the year-over-year growth figure to +21%.  For the month, the single-family element fell -2% (+15% year-over-year), while the notoriously volatile multi-family category rose +26%.  Building permits rose +2.7%, just short of the expected +2.9% figure.  As with starts, a small decline in single family here was also outweighed by a double-digit gain in multi-family.  Overall permits are up +12% for the trailing year.  These stats show continued strength in the recovering housing sector from very low levels.

(+) The NFIB small business optimism index was a bit more optimistic in July, with an increase from June’s 93.5 up to 94.1 (forecast was 94.5).  Underlying components were generally higher was well, including plans to hire, expectations for sales and expansion sentiment; on the other hand, feelings about the economy ironically worsened.  While this index has improved to new post-recession highs, it’s below earlier cycle levels pre-recession.  The contradictory tone is somewhat par for the course with small business-oriented measurements in this recovery.  While owners have steadily felt better about their own business prospects and acknowledge an improved outlook, feelings about the broader U.S./global economy appear less buoyant, and are tied in with frustrations about tax and regulatory policy.  Whether it’s the current administration or an ongoing condition, this is a byproduct we’re getting used to seeing.

(-) The preliminary August Univ. of Michigan consumer sentiment measure fell from July’s 85.1 to 80.0 in August, also underperforming the 85.2 reading expected, and down to the lowest level in four months.  Consumer assessment of current conditions fell several points, as did expectations about the future (although by not quite as much).  Inflation expectations for the 1- and 5-10 year periods looking forward were within a few tenths of a percent around the 3.0% long-term average level.

(+) Initial jobless claims for the August 10 week fell again, down to 320k—exceeding expectations of a 335k reading—representing the lowest level of initial claims in six years.  The earlier ‘special factors’ of auto plant shutdowns and the like tapered off and now appear to be a non-issue.  Continuing claims for the Aug. 3 week came in at 2,969k, which was lower than the 3,000k expected, and sustained the positive trend here as well.

Period ending 8/16/2013

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