U.S. economic reports released Dec. 13 argued strongly against market fears that a sharp economic slowdown is already under way, as well as perceptions by some that the Federal Reserve's inflation fears are misplaced. Although downside risks to the 2008 economy are clear, a jumbo surge in November retail sales shows that falling confidence is not translating to spending restraint. And, soaring producer prices through November make equally clear that the Fed faces considerable upside risks for inflation.
In addition, weekly figures on first-time unemployment filings show that the U.S. jobs market is loosening through the fourth quarter at a gradual pace that is not likely to meaningfully affect consumer behavior. Finally, a report on business inventories shows that we will end the year with inventory-to-sales ratios at all-time lows, hence leaving little room for a further inventory correction in 2008.
Here is Action Economics' rundown of the Dec. 13 reports:
The U.S. retail sales surge, both via enormous November gains (the headline rate rose 1.2% on the month, 1.8% excluding autos)—and upward revisions to September and October—has thrown a monkey wrench into the slowdown scenario. Negative headlines surrounding the banking sector are apparently having little impact on consumer spending despite news pessimism regurgitated in the various consumer confidence surveys. The working assumption of most economists—that bank turmoil is sending shock waves through households—is an unproven hypothesis, even though consumers clearly are reading the news about it in the paper and are also displaying the usual displeasure with paying more for gasoline at the pump.
As we frequently note, however, confidence declines when gasoline prices rise are actually correlated with spending gains, as gasoline purchases are part of the economy.
The figures imply that third-quarter gross domestic product in the final report to be released Dec. 20 will be boosted to 5% from 4.9%, with a $2 billion boost from consumption. We now also project 1% GDP expansion in the fourth quarter, with a 1.8% growth clip for real consumption, though we have posted offsetting downward bumps to our first and second quarter GDP estimates, to 1.6% and 2.6%, respectively. As it stands, even if spending posts a pullback in December, the robust trajectory of consumer outlays through November will make it difficult to argue that consumer spending is slowing.
Producer price index
The U.S. PPI report, with its outsized 3.2% November headline gain and 0.4% core (excluding food and energy) increase, revealed a sharp bounce in the overall year-over-year rate to 7.2% from 6.1% in October. That beats the 6.9% year-over-year cyclical high following hurricanes Katrina and Rita—and this time without the help of a hurricane. The core rate fell in November because of an easy comparison, to 2% from 2.5% in October, but this will be of little relief to the Fed.
The November PPI price gains were even more alarming than the jumbo price gains in the November trade price report. We will continue to assume November headline gains of 0.5% for the consumer price index and PCE chain price indexes, alongside 0.2% core increases, though both sets of figures face upside risk given price pressures in the available reports.
Ongoing strength in headline inflation should keep Fed policymakers on their heels regarding inflation risks, even if core inflation stays restrained for now and the market remains more interested in recession risks. It is clear that soaring energy prices and a falling dollar are driving up the U.S. inflation figures. And the hefty fourth-quarter price surge will likely continue to place upward pressure on the U.S. inflation reports via pressure on core prices as we enter the first quarter, even if energy prices plateau at current high levels.
The U.S. business inventory report revealed a 0.4% October retail inventory gain that was just a tad stronger than expected, alongside the previously released October inventory figures from the factory and wholesale reports of 0.1% and unchanged, respectively.
The data leave no likely revision in the inventory component of the final third-quarter GDP report, though we do expect GDP growth for the period to be boosted to 5% from 4.9%. Our upwardly revised 1% fourth-quarter GDP estimate, which was boosted by the November retail sales data, incorporates a $16 billion inventory subtraction, because cautious business managers are likely cutting back on restocking plans despite nominal sales strength.
Initial jobless claims
The decline in the initial jobless claims in the second week of December to 333,000 reinforces the conclusion of recent months: that claims were drifting up from the 318,000 area before the credit crunch hit in August, but only by a modest 15,000-20,000 or so, which is tiny compared with the much larger 100,000-150,000 move that might be expected with a mild recession.
The figures reinforce the message from the November nonfarm payroll report that the slowdown in job growth remains gradual and, as of yet, modest.