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Economic Watch: Latest Indicators Lagging but Consumers Upbeat

January 15, 2016

By Evan Lockridge

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The latest numbers about the state of the American economy show activity has slowed in key sectors, including one of the biggest drivers, with retail sales turning in its weakest improvement since 2009.

The U.S. Commerce Department reported on Friday a 0.1% decline in December from the month before. Falloffs occurred in nearly half of the 13 major retail categories, including a 0.9% drop at clothing stores while sales at gasoline stations, which are not adjusted for price changes, showed a 1.1% decline.

November sales were upwardly revised from a reported 0.2% increase last month to a 0.4% gain.

Excluding sales at auto dealerships, gasoline stations and building material stores, “core sales” declined 0.3% following a downwardly revised 0.5% gain in November that was originally a 0.6% improvement.

Despite the December decline from November, sales during the month were 2.2% higher than compared to December 2014

For all of 2015, retail sales increased 2.1% from the year before, following a 3.9% improvement in 2014 from 2013 and a 7.4% gain in 2009.

The drop in December retail sales, which drives about two-third of all economic activity, and weaker-than-expected underlying details, is disappointing. However, part of the decline may reflect the temporary negative impact of warm weather on winter clothing sales dominating the positive impact on other components like restaurant sales, according to Nathan Janzen, senior economist at RBC Economics.

“On balance, the data points to overall real consumer spending growth slowing to a 2% rate in the fourth quarter 2015 from the 3% and 3.6% increases in third quarter and second, respectively,” he said. “That still marks a respectable pace of growth, however, it is below the 2.3% we previously assumed and leaves our monitoring for overall fourth quarter gross domestic product (GDP) growth at 1.2%, down from 1.4% previously and further below the 2% gain in third quarter.”

He believes with solid growth in employment being maintained through the fourth quarter, the slowing will be temporary with a stronger trend growth in consumer spending, closer to 2.5% on average in 2016, “supporting a return to above-potential GDP growth early in 2016.”

Manufacturing Slips Along with Overall Industrial Production

Meantime, a report from the U.S. Federal Reserve on a smaller part of the economy, though still an important one to trucking, shows manufacturing continued slipping in December as total industrial production also fell.

Industrial production declined 0.4% in December, the fourth drop in the past five months, primarily as a result of cutbacks for utilities and mining, while total industrial production in November was larger than previously reported. But upward revisions to earlier months left the level of the index in November only slightly below its initial estimate.

Manufacturing output edged down in December by 0.1% while the measure for utilities dropped 2% as continued warmer-than-usual temperatures reduced demand for heating. Mining production decreased 0.8% in December for its fourth consecutive monthly decline.

According to the Wall Street Journal, output of motor vehicles and parts and primary metals each fell by more than 1.5%. However, those declines were offset by increases in other long-lasting durable goods such as electrical equipment, appliances and components for computer and electronic products.

For the fourth quarter as a whole, industrial production fell at an annual rate of 3.4%, its worst showing since the Great Recession. And that despite a 0.5% gain in the larger manufacturing sector.

At 106% of its 2012 average, total industrial production in December was 1.8% below its year-earlier level.

Capacity utilization for the industrial sector decreased 0.4 of a percentage point in December to 76.5%, a rate that is 3.6 percentage points below its 1972–2014 average.

This report follows two separate ones earlier in the month showing declines in manufacturing in late 2015, including one showing the sector contracted for the second straight month in December.

“Data on the larger manufacturing sector have been mixed with any recent gains being largely offset by modest declines in the following months, said Josh Nye, economist at RBC Economics. “That choppiness left year-over-year growth at just 0.9% in December, which was the weakest pace in nearly two years. The manufacturing sector continues to face headwinds from a strong U.S. dollar and weaker external demand, as well as spillover from the struggling energy sector.”

He said this report and other recent ones on manufacturing, especially for new orders, indicate little prospect for a strong rebound in manufacturing output in early 2016.

Producer Prices Decline as Inflation Remains Weak

The declines seen in the retail and even manufacturing sectors of the economy may have also translated to a drop in wholesale prices for December.

A Labor Department report on Friday showed another monthly decline while 2015 posted its biggest drop in five years.

The Producer Price Index (PPI) fell 0.2% last month from November while it posted a decline of 1% last year, due in large part to a 29% drop in gasoline prices. Overall energy prices also declined while wholesale food prices fell by 1.3% in December, its biggest drop in 10 months.

When volatile food and energy prices are removed, December core prices posted a 0.1% increase while they posted a 0.3% increase for the 12 months through last month.

On one hand, this news about the PPI indicates that inflation is expected to remain largely a non-issue for the economy, On the other hand, it remaining low to non-existent can be a sign of weaker overall demand for products and services, a possible trouble sign for the overall American economy.

“Price pressures continue to abate as we head further into 2016," according to Stifel Fixed Income Chief Economist Lindsey Piegza.

“Lower energy prices seeping into the broader economy continue to threaten the Fed's expectations of a near-term improvement in inflation back towards the committee's longer-term objective of 2%,” she said. “Still, from the Fed's perspective, the lack of inflation will not deter the Federal Open Market Committee from pushing forward with additional rate increases this year. After all, inflation was nonexistent at liftoff and furthermore, the Fed is no longer focused on reality but expectations.”

Piegza pointed out, as Fed chair Yellen has said, that the committee doesn't need to see inflation rise to expect a rise in inflation.

“In other words, as long as the committee expects further improvement in the economy and a rise in inflation, the lack of evidence or further proof of the counter argument will do little to dissuade the Fed from hiking rates three or so times this year, pushing the Fed funds rate up past 1%, with the first rate hike potentially as early as March,” she said.

Yet Consumers Still Upbeat

The one surprise in all of this mix is that consumers are still feeling relatively good, though not as much as a year ago.

The University of Michigan Survey of Consumers saw its measure of consumer confidence post its fourth month-over-month increase in January and its highest level since June at 93.3, due to more positive expectations for future economic growth.

However, its separate gauge of current economic conditions was down from December but consumer expectations increased.

“Personal financial prospects have remained largely unchanged during the past year at the most favorable levels since 2007 largely due to trends in inflation rather than wages,” said survey Chief Economist Richard Curtin. “Indeed, expected wage gains fell to their lowest level in a year in early January, but were more than offset by declines in the expected inflation rate. The result was that inflation-adjusted income expectations rose to their highest level in nine years.”

He said consumer optimism is now dependent on the continuation of an extraordinarily low inflation rate.

“Given the favorable overall state of the Sentiment Index, the data continue to indicate that real personal consumption expenditures can be expected to advance by 2.8% in 2016.”

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