Decent Numbers

The end of the week brought a flurry of economic reports, none were surprising and all were supportive of the notion that economic growth is steady, but not spectacular.

Retail sales rose a decent, but not terrific, 0.6% in December. This is off a little from November’s 0.8%, but is still within the realm of sufficiency. For the year as a whole sales were up 6.6% which, again, is better than we have seen recently, but not breathtakingly good. The key point to take away is that consumers are returning to the stores, which means that the consumption component of GDP will continue to tick along. This is critical since it amounts to about 70% of the entire economy. One thing to follow closely is the level of auto sales. Car makers are experiencing a revival at the moment and car sales skewed the overall retail sales figures. Take them out and sales grew more slowly at 0.5% in December. This is the opposite of the skew in November, when a swing in auto sales actually reduced the total rather than added to it. The point being that auto sales are trending up but have, as they always do, a very bumpy trajectory around that trend line. In any given month auto sales can muddy the overall view quite a bit. Hence the need to back them out in order to understand the basic trends.

A similar problem exists in the Consumer Price Index. We saw a big jump in prices in December, CPI rose 0.5%, compared to 0.1% in November. But before we all start to jump on the impending inflation band wagon, let’s back out fuel prices: when we do that December “jump” is eliminated and we drop back to the same 0.1% we had in November. So the recent rise in oil prices has skewed the data. Should we be concerned? Not yet. Fuel and food prices are notorious for jumping around. They can often hide the real trend in inflation and so we need to look at prices both with and without them. The so-called core inflation rate, which excludes food and fuel prices, is low and very stable. It is the basic trend we refer to when we talk about disinflation. For the whole year 2010 core inflation was a very low 0.8% compared with 2009’s 1.8%. So at a base level prices have shown a decreasing rather than increasing trend over the last twelve months. Even the entire CPI including the more volatile items trended down: it rose 1.5% for the entire year compared with 2.7% in 2009.

So inflation is not a problem at the moment.

But those fuel and food prices could become troublesome in 2011 and beyond as worldwide demand stays ahead of production. This is likely to be especially true in raw material prices, so we should expect commodity prices to rise more rapidly than other prices. Food too looks to be a problem. The US just downgraded its forecast crop yields, a move that immediately sent food futures rising. Longer term this is more a problem of infrastructure than capacity: food availability and prices in many poorer countries is more a function of bad transportation than it is of capacity to produce. Africa in particular suffers from this problem. Then again there is the distortion in world prices caused by the pervasive subsidization of food prices in wealthy countries. Many rich countries are loath to cut those subsidies and expose their farms to worldwide competition. High sugar prices in the US are a notorious example of the consequences of such subsidies. At the same time, by giving agriculture so much welfare both the US and Europe end up producing too much food. This excess gets dumped on the world markets where it depresses prices and forces local producers in places like Africa out of production. So one of the largest causes of periodic famine in Africa is not the local infrastructure or practice, which are both bad, but the ongoing subsidy to American and European farmers. Which makes a mockery of the usual subsequent “gifts” of food from those places. The gifts turn out to be drawn from an excess that caused the famine the gifts are supposed to ameliorate.

Other data released today shows that industrial production jumped 0.8% in December. Once again we need to dig beneath the surface. When we do we find that it was utility output adding an extra bounce to the increase. December was a cold month for much of the country and so utilities were generating extra power. Take that bump out and production grew at a lesser rate or about 0.3%. For the entire year 2010, industrial production rose 5.9%, not a bad recovery, but not a boom. This increase in production pushed capacity utilization rates up as well, to 76.0%, an increase of 0.6%. But this level of utilization is still way below the average – by between 4.5% and 5.0% – for the thirty years ended in 2009. So the economy is still flush with spare capacity in need of use before we arrive at a period of new expansion.

One last report worth talking about is the University of Michigan consumer sentiment index for early January. This shows a slight decrease in optimism, driven apparently by that jump in oil prices I mentioned above. The decline in optimism is not huge, but were food and fuel prices to keep up steady increases it may be sufficient to dampen consumption later in the spring or early summer.

So there you have it. A fairly routine round up of the data.

None of it is a surprise. None of disturbs the overall outlook. None of it is great cause for alarm.

Which is good. We could all do with a little hum drum news as we continue to dig out of the mess caused by great recession.

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