Weekly Economic Commentary • Principal Global Investors
Covering the week ended April 18, 2014 — Published on April 24, 2014
It's Getting Better
U.S. data continued to improve last week. Stock markets also rebounded pretty nicely after the prior week's sell-off. The S&P 500 increased 2.7%, the best since July, as the NASDAQ and Dow increased by around 2.4%.
Key March data robustly accelerated. Industrial and manufacturing production increased 0.7% and 0.5%, respectively. Even better, February industrial production and manufacturing growth were upwardly revised to 1.2% and 1.4%, respectively. Capacity utilization increased to 79.2%, the highest since June 2008. Headline retail sales increased 1.1% month-over-month as February retail sales were upwardly revised from 0.3% to 0.7%. Gains were broad based; 10 out of 13 sectors had improving sales. Jobless claims increased by 2,000 to 304,000, but the four-week moving average was 312,000 — the lowest since October 2007. The two April regional manufacturing indexes were mixed. On an Institute for Supply Management (ISM) basis, the Philadelphia Federal Reserve's (Fed's) manufacturing index increased from 50.4 to 52.9 as the Empire index dropped from 51.7 to 49.6.
Housing data was softer than industrial production and retail sales. The National Association of Home Builders (NAHB) confidence index was basically unchanged at 47; the index has been about the same for the last three months. Housing starts increased 2.8% in March but permits declined 2.4%. However, the backlog in housing was up over 25% from last March as weather likely delayed construction this winter. Another indicator of how weather likely affected the housing sector: Housing starts were down 5.9% year over year, but permits were up 11.2%. Permits data is less sensitive to weather. Permits also led future construction, a positive for housing starts.
We thought that the slowdown in economic data in December and January was mostly weatherrelated, because the underlying momentum in the U.S. economy was pretty decent. Thus far, our conjecture appears to be holding true for most sectors of the U.S economy. Retail sales, manufacturing, and payrolls all rebounded in February and March. The housing sector data still remains a bit weak but leading data suggests it may rebound later in the spring.
Inflation Trending Up …?
Not yet. In this section, we review the latest inflation data. For March, both the headline Producer Price Index (PPI) and Consumer Price Index (CPI) increased more than expected. The headline PPI jumped 0.5% month-over-month, the largest gain in nine months. Despite modestly surprising to the upside, year over year, producer prices were up only 1.4% and consumer prices increased by only 1.5%.
Higher food prices are likely to continue throughout the year as these supply issues continue, and with higher emerging-market demand. However, the projected magnitude in price gain this year is less than the price spikes of 2008 and 2011. The USDA expects food prices to increase between 2.5% to 3.5% in 2014. That's more than the 1.4% gain in 2013, but below the 2008 and 2011 increases of 5.5% and 3.7%. That said, if there is little wage inflation, higher food prices may weigh on consumer spending — a risk to watch.
Wage Pressures? Higher wages would signal that there is less slack in the labor market. Currently wage growth remains constrained. Hourly wages grew about 2% in March, in line with the average since the end of the recession. For full-time workers, median weekly earnings increased 2.7% in the first quarter, the largest gain since the end of 2009, but well below the pre-recession peak of over 4%.
Conclusion: Inflation modestly accelerated in March. Higher prices for demand services explained the boost in producer prices. Food and shelter price increases explained the gain in the CPI. Food prices will likely continue to rise throughout the year as drought and virus affect supply. However, the gains in food prices will likely be less than the price spikes of 2008 and 2011. Despite these price gains, year over year, inflation remained well below the Fed's 2% target. Ultimately, more wage growth and broader gains in consumer prices are needed for sustained growth in inflation. If the economy accelerates as we expect, then wage growth could mildly accelerate later this year or next. That would be a good thing for the economy.
Another Week, Another Speech
Federal Reserve Chair Janet Yellen continued to step back from her unexpected statement at the Federal Open Market Committee (FOMC) press conference on March 19. In her speech at the Economics Club of New York, the Chair focused on the evolution of the key measures for Fed policy, the labor market, inflation, and the shift in forward guidance from quantitative to qualitative.
Yellen continued to emphasize there was a lot of slack in the labor market and re-outlined the key measures in her qualitative assessment of that market. Like her speech a couple weeks ago, Chair Yellen pointed to the unemployment rate, the number of longer-term unemployed, the labor force participation rate, and weak wage growth.
Global Economic News in Brief
Chinese GDP increased 7.4%, more than market expectations of a 7.3% increase. Fixed-asset investment increased 17.6%, the lowest increase since 2002. From February to March, new yuan loans increased from RMB 644 billion to RMB 1050 billion as aggregate social financing more than doubled from RMB 938 billion to RMB 2070 billion. Faster lending growth may signal that the Chinese government already started fiscal easing on the margins last month.
Eurozone industrial production increased 1.7% year over year in February. European auto sales increased 10.6% in March; sales were up in the U.K., Spain, France, Germany, and Italy. However, the March CPI increased only 0.5% year over year suggesting that the deflation risk remains high for the monetary union.
Last Thursday, the E.U., Ukraine, Russia, and U.S. agreed on an accord to deescalate tensions in Ukraine. However, a similar plan, including the disbanding of armed groups, was put in place in February and then ignored. Over the weekend, there was a shootout between unknown assailants and pro-Russian separatists in the East. Continued tensions in Ukraine may keep downward pressure on U.S. rates even if U.S. data continues to improve as we expect.
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