CPINothing surprising in headline or core CPI.
Based on yesterday’s PPI data, it is apparent that demand is going to continue to be insufficient to pass through increased costs without an improvement in employment/aggregate incomes and that – in certain categories of goods where costs must be passed through (e.g. gasoline) – demand destruction will likely be the outcome of material price increases.
But the headline CPI story really is energy commodities (up 7.5% in December), not food (up 0.1% – fully absorbing a 2.7% bump in fruits and veggies that mums have been complaining about) – despite observations of some to the contrary. And here’s the catch: Energy prices for dollar denominated commodities cannot be tied entirely to “emerging market competition for scarce resources” on a month-to-month basis, as some postulate. And it is certainly not principally a function of increased domestic demand. It is, rather, very much a reflection of fluctuating currency exchange rates and the relative weakness/strength of the dollar. Is it “inflationary” – sure, technically. But, let’s face it – the dollar bottomed back in the early part of Q4 (when supplies currently on the street were bought) and crude prices (in dollars) naturally took off from the 14-day average in $70 to $80 range at which it had been hovering since it recovered from the 2009 panic lows. But the dollar has recovered somewhat since late October and we don’t think we will see in January anywhere near the 8.5% hike in gasoline that we just saw for December.
If you really want to use rearview consumer price data to be predictive about future inflation/deflation, turn your attention to the 16% trimmed mean CPI data released monthly by Brent Meyer of the Cleveland Fed. This month’s release is attached for your convenience. Excellent research by the Cleveland and Atlanta Federal Reserve Banks has proven that the 16% trimmed mean number is far and away the most reliable predictor of future price movements. It has been bouncing around between 0.00% and 0.10% for the past six months and up a whole 0.8% over the trailing twelve months. Sorry gold bugs – both the dollar and “no-flation” will be challenging your precious metal for a while.
Ho-Ho-NO! The data is in and Santa seems to have stumbled a bit on his way down the chimney. The mum rise was less than expected at 0.6%, but have a look at the components….Gasoline sales up 1.6% for the month thanks to the inflation in gasoline prices discussed above, while Electronics were down 0.6% and General Merchandise down 0.7% (including Department Stores which were down 1.9% from November). Shoppers clearly lost interest after the Black Friday weekend – certainly relative to many economists’ expectations. The +0.5% ex-autos gain was not entirely EX-AUTOS. A good deal of it ran right through cars and trucks, and out tail pipes, in the form of inflated gasoline sales. One brighter sign – building materials, up 2.0% mum. Apparently folks opted for practical gifts at Home Depot in December.
As we have been harping on for some time, we think we know why retail sales have been coming and going with great regularity. Today’s retail sales data demonstrates the inflection point that we predicted would form in our (newly updated) graph, attached, which derives from our November report entitled Retail Sales as the Echoes of a Pre-Crisis Habit. See the revised chart attached.
Our seasonally adjusted, three month moving average growth rates for retail sales and consumer credit continue to exhibit the pattern discussed in the report. Note particularly that 3 month average retail sales growth plateaued in October/November and fell noticeably in December. As forecast in our November report, and the rate of consumer deleveraging slowed dramatically through October. In fact, we saw two straight months of actual growth in consumer credit (September/October), a phenomenon not seen since July 2008, when consumer credit was still relatively available. We expect to see the rate of consumer deleveraging pick back up slightly when the data for December is made available by the Fed – which rate will grow even more during the current month. Repeating our thesis:
“Expansion and contraction of retail sales in the post-panic U.S. economy has been predominantly the result of fluctuations in the use and repayment of consumer credit facilities, not the normal recovery patterns expected following a garden-variety recession These activities principally represent the overall recent patterns of consumer saving, punctuated by periodic dis-saving as credit facilities free up, are employed again, and then must be paid down anew.”
The only way out of the foregoing micro-cyclical pattern is through net growth in aggregate incomes, which can only be realised through increased wage rates and/or an increase in employment.
As a rule, we don’t like to write about poll data (if you exclude the BLS Household Survey from that statement!). But perhaps we can make out a correlation that plays off the above points we have made. Is it possible that the consumer get the blues when he’s exhausted his available credit yet again? The ups and downs in confidence during 2010 loosely pattern the micro-cycles discussed above – but maybe we’re just seeing things!
The pickup in factory production (although unduly influenced by a 4.3% rise in utility plant output as a result of chilly weather) of 0.8% was a very welcome number. The manufacturing portion of the IP number – up 0.4% – is solid and, if sustained, could bode well for industrial employment this year. Capacity utilization, while still weak – turned in a handsome increase to 76%.
We believe that the United States is going through a painful rebalancing of prices and wages relative to the emerging nations. We see overall pricing pressures on manufactured goods and related wages as being generally negative given the enormous gap, in labour and capacity costs, between the developed and emerging worlds. This steady pressure will continue to result in the repatriation of manufacturing output and, in turn, the creation of more domestic manufacturing jobs.
Making more (domestically) of what we consume, and brining overall consumption into line with our overall economic production (i.e. not going further into debt) are the two keys that will unlock meaningful economic growth without continued government life support and intervention. While the manufacturing sector is but a small part of our economy today (under 20%), we firmly believe that it will grow as a proportion of GDP as the rebalancing – which will be accompanied by a degree of deflation – proceeds.
By Daniel Alpert, Managing Partner, Westwood Capital, LLC and affiliates