The overall consumer price index (CPI) rose 0.3% in September, while the core aggregate (excludes food and energy prices) revealed a modest 0.1% gain. The figures were in-line with expectations.
Accounting for nearly all the strength on the month was a 6.3% surge in gasoline prices, which left the energy aggregate jumping 3%. Food prices rose a relatively tame 0.2%, especially compared to the 1.2% surge in wholesale (PPI) food prices. Most of the core components revealed figures on par with recent trends.
Overall, while the economy has shown several months of robust growth, with little sign of an imminent slowdown, retail inflation pressures remain very subdued. With this month's gain of only 0.1%, the core aggregate is rising at a tepid 1.2% year-over-year rate, which marks a new secular low dating back to 1966.
But much of this disinflationary pressure is probably already behind us. Note that the core was up 1.5% at a seasonally adjusted average rate in the third quarter compared to 0.8% and 1.0% in the first and second quarters of this year. While the weakness in the dollar and a lagged response to the acceleration in growth could put some upward pressure on the inflation aggregates in 2004, for now, the price outlook remains benign. This will keep the Fed on the sidelines over the near- to medium-term.
Philadelphia Fed Survey Shows Strength
The October Philly Fed manufacturing index jumped to 28.0 from 14.6, which puts the index at the highest level since July of 1996.
Strength was broad-based. New orders surged to 29.0 from 19.3 and shipments jumped to 28.8 from 13.2 -- both marking multi-year highs. Employment also posted a notable improvement, with the employees index rising to 5.5 from -4.7, while the workweek surged to 13.5 from 3.5. This is the strongest reading for the employment component in three years. Prices paid fell to 22.3 from 22.5 and prices received rose to 5.4 from 4.8.
Overall, the survey confirmed the strength seen in the New York-FRB Empire State survey. Both figures are consistent with an ISM-adjusted level of 58.5 to 59.0. In addition, the data also suggest risk that October industrial production could top 1%, while the improved tone in the employment components bodes well for the outlook as well.
While some of this strength may be due to a manufacturing rebound following disruptions related to the blackout in August and the Hurricane in September, our guess is that the recent notable acceleration has more to do with the improvement in underlying fundamentals -- such as strong demand and extremely lean inventory levels.
Industrial Production Rises
September industrial production rose 0.4%, which left capacity utilization at 74.7% from August's reading of 74.5%. The headline figure was below our estimate and was primarily due to unexpected weakness in utilities, which dropped 2.2% following the strength over the summer.
Manufacturing, however, jumped 0.7%, led by a nearly 7% surge in Vehicles and Parts, as ongoing strong demand, relatively lean inventories, and make-up for the blackout-related drop in August all provided support.
Overall, the report is consistent with the notable uptrend seen in other manufacturing reports over the last couple of months, which supports the view that a more pronounced recovery has taken hold.
But capacity utilization suggest a lot of slack remains in the economy. The current utilization reading of 74.7% is 1.3% below the rate that was in place last year and is nearly 7% below its 1972-2002 average. For now, current levels of capacity utilization suggest that a few more quarters of strong growth can be easily absorbed by the slack in the economy -- leaving little near-term threat on the inflation front. This is yet another reason why the Fed will remain on the sidelines over the near- to medium-term.
Weekly Jobless Claims Fall
U.S. initial claims fell 4,000 to 384,000 in the week ended Oct. 11, vs. an upwardly revised 388,000 level in the previous week. Initial claims are now at the lowest level since early February.
The decline in claims during the week pulled the four week moving average down 4,000 to 391,000, which is also the lowest level since February of this year. Meanwhile continuing claims rose 58,000 to the 3,674,000 level in the week ended Oct. 4.
While the drop in claims during the most recent survey week is certainly encouraging at first glance, upward revisions to the previous week put the level of claims at around what was originally seen in the previous week (382,000.) Consequently, the report as a whole does not alter our view that the labor market is merely slowly improving. Moreover, a surge in continuing claims to the highest level since June suggests that hiring has yet to pick-up significantly.
From MMS International