Wednesday, January 18, 2012

PPI, IP and NAHB different wrinkles on the outlook

Three reports… like three blind men feeling the elephant...
·         The PPI shows inflation trends to be tempered but it show some inflation is percolating. The Fed is not focuses on this so this is not analysis for Fed policy but could be something to watch.
·         Industrial output has stopped accelerating. It is growing nicely in Q4 and there are some hints of slowing down. We know we lose momentum from exports. The thrust for IP will be determined by the consumer here at home.
·         As for the housing sector the NAHB index jumped but we think weather distortions were behind it. Beware the effects of weather in the winter months

Is the PPI Percolating?
The PPI head lines is at -0.1% leaving the Yr/Yr still strong at +4.8% But inflation is declining if we look at sequential growth rate to 2% over six months and to -0.6% over three months (all at annual rates).

But for the part of this report that feeds into what the Fed will most care about, the CPI, the trend are worse. Finished consumer goods at the PPI level show their core trends to be more stubborn. this month the Core Fin Goods PPI rose by 0.4% in December. Over three months the annual rate is 2.5%, compared to 3.3% over six months and 3.6% over twelve months.

Still the higher inflation might reflect just a bit more consistent demand. If those two things go together, the Fed will have some choices to make in 2012.

The economy is too weak for the Fed to worry much about that right now- right or wrong that is the Fed's bent. Some are worried that the Fed is letting inflation and inflation fodder flourish longer than it should. Perhaps that will be the unexpected transition in 2012? Will inflation begin to emerge faster than what people think?

The core PPI suggests that even after all the trouble of last year core prices for finished consumer goods in the PPI showed some pressure, rising 3.6% on the year. If growth picks up in 2012 why should that figure be lower? And when with that sort of pressure when will it stick in the CPI itself?  

Industrial output rises
After dropping by 0.2% in November industrial output rose by 0.4% in December 2011 to end the year on a better note.

Still sequential growth rates are unclear as the growth trends shows 2.9% over 12-months, moving up to to 4.7% over six-months and back down to 3% over three-months.

Momentum has had its wings clipped, but not deeply severed.

Overall output rose at a 1.6% annualized rate in Q4 compared to 1.9% for MFG. 

The MFG slow down may also be seen as a failed speed up as growth is at 3.7% over 12-Mo then 5.7% over 6-Mo and 3.9% over three mo. The 3.9% over 3-Mo is slowing compared to six months but not to 12-months. and 3.9% is not a bad rate of growth at all.

Consumer output has slowed. Overall it is to 0.4% over three months from roughly 2% over six-months and 1% over 12-months.  For durables the slowing is to 4% over three months from over 8% over 6- and 12-months. Nondurables output slowed as well but the output there is energy goods: non-energy durables picked up over three-months to a 1.3% pace while output of energy goods plunged at a 4.9% pace. 

Excluding tech and transportation business spending has been very stable at around a10% pace. but spending on Vehicles has slowed steadily and sharply while spending on computers and office equipment plunged to zero in Q4. Materials output continues at a barely reduced pace in the quarter.

On balance there is substantial evidence of slowing of output in Q4. But the slowing is not dramatic; its a moderation. Inventories are lean and the outlook surely will depend on the consumer. US exports are starting to sputter and that portion of output that gets exported should start to slow. 

The January NAHB index jumped to level of 25 (from 21 in Dec) its highest level since June of 2007, a 55-month high 

The single family sales index rose to 25 in Jan from 22 in Dec.
The six month outlook index rose to 29 in Jan from 26 in Dec.
 The January Traffic index rose to 21 in Jan from 18 in Dec.

By region the NE made the biggest jump to 23 from 14. The West index spurted to 21 from 16. In the South the index advanced from 25 to 27. In the Mid West the index edged higher to 24 from 23.

The regional data under score that this index has huge elements of weather in it. In the South where the weather is generally more temperate the index did not move up by much in the period of abnormally warm weather. In the NE where weather is a huge winter factor the the index made a giant leap. The West is a combination of cold/warm regions and the index saw a moderate advance. The Midwest is largely cold but there was little special impact there as the local index made a small rise.

Weather seems to be importantly behind the rise in this index. the good weather helped to get people out as the traffic index made the greatest percentage gain- but each survey component rose by 3-points.