Wholesale Prices Surge
The producer price index (PPI) surged 0.8% and the core index (excludes food and energy) rose 0.5% in October.
While the gain in both the overall and core PPI greatly exceeded expectations, it was largely due to the changeover by auto makers to a new model year -- which translated to a 1.6% gain in motor vehicle prices. Truck prices jumped 3.4% and car prices rose 1.6%. October seasonals attempt to adjust for the increase in price related to the new-model year. However, the adjustment process has proven rather challenging over the years, with actual price changes greatly exceeded seasonal expectations to result in a sizable distortion to the headline figures.
Removing the vehicle component from the core left the index rising 0.2% instead of the 0.5% gain that was reported. A 2.2% gain in food prices is also notable, but an 18% surge in beef prices was responsible for much of the increase. Removing the impact of beef, the overall-PPI would have registered a 0.5% gain.
Overall, excluding both the vehicle price and food price distortions, the price backdrop at the wholesale level remains nonthreatening. Combined with expectations for further price declines at the consumer level, the Fed should retain plenty of leeway on the policy front.
Consumer Sentiment Improves
The preliminary November reading for the University of Michigan's Consumer Sentiment jumped to 93.5 from October's 89.6. The gain marks the highest level of sentiment since May of 2002. It comes as little surprise that sentiment continues to improve, given the ongoing strength in the economy, indications that the labor market has finally turned for the better, and the stock market continuing to hover near year-highs.
As for the components, the present situations index increased to 102.8 from October's 99.9, while expectations jumped to 87.6 from 83.0.
Overall, the current level of sentiment remains notably above its historical average of 86 and, as such, is consistent with a solid level of consumption. While real consumption appears set to slow to less than 2% in the fourth quarter following the 6.6% surge in the third quarter, this still leaves second-half growth at a solid 4%.
And given expectations for a further improvement in the labor market and a tax-related boost to disposable income in the first-half of 2004, the outlook for sentiment and consumption appears to be solid. Trends in the labor market and the stock market should continue to set the tone for upcoming sentiment readings.
Retail Sales Fall
October retail sales dropped 0.3%, while the ex-auto aggregate rose a modest 0.2%. The data were not that different from expectations.
The headline decline also marks the second straight month of decline following the robust growth rates over the prior three months. This pullback in consumption is consistent with the swing in disposable income, which got a big boost over the summer on record refinancing and the tax stimulus package. But now we are seeing the offset for that strength.
Given the recent subdued levels of spending, real consumption in the fourth quarter is expected to rise 1.5% to 2.0% following the 6.6% surge in the third quarter. This would still leave overall second-half growth at a solid 4%. And given that a rebounding job market and the tax stimulus package should support solid levels of disposable income growth in the first-half of 2004, spending is expected to maintain a solid trajectory.
As for the details of the report, the auto component was the biggest drag, with a decline of 1.9%. This was followed by a 1.6% price-related drop in gas service stations. In addition, warm weather on the month appeared damp seasonal demand at chain stores, with general merchandise and apparel both revealing little change.
Industrial Production Edges Up
October industrial production rose 0.2%, which left capacity utilization at 75.0% from 74.9%. Overall, there has been a notable upswing in various manufacturing reports in recent months, and this report generally confirms that uptrend.
Manufacturing, however, rose only 0.1% following the 0.7% surge in September, led by a nearly 4% drop in the vehicles and parts component. But, outside of vehicles, the tone was much better, with the ex-auto manufacturing aggregate rising a healthy 0.4%.
High-tech continues to lead strength, posting a gain this month of 2.5%. Utilities also provided a boost on the month with a gain of 2.0%, which was partially offset by a 0.8% decline in mining.
Overall, the data confirm that production rebounded 4% in the third quarter following a 4% decline in the second quarter. We expect fourth-quarter production to top 4%.
Despite the upswing in activity, utilization rates continue to hover at historically low levels. The current reading of 75.0% is still over 6% below the 1972-2002 average. While ongoing strong demand and attempts to replenish depleted inventory levels should continue to take up some of the slack, the current level of under-utilization is unprecedented this late into a recovery.
From MMS International staff economists