October 16, 2012
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Consumers opened their wallets to purchase not only gas, food, and clothing but also cars, phones, and a wide variety of other goods in September to give a lift to third quarter retail sales (+ 5.5%) following a decline in in the second quarter (-1.0%). In September, retail sales moved up 1.1% and estimates of retail sales for July and August show upward revisions. Typically in assessing the underlying strength of retail sales, gasoline sales are excluded to eliminate the impact of price swings, nominal auto sales are subtracted because unit auto sales matter in the computation of GDP, and building materials are stripped out as they are part of residential investment outlays. The resulting “core retail sales” also advanced in September (+0.9%), which puts the quarterly annualized increase at 4.6% vs. a paltry 1.4% gain in the second quarter. The obvious inference is that consumer spending will most likely post a gain that exceeds the 1.5% increase in the second quarter and it could be close to our forecast of 2.0% growth. The repair and strengthening of household balance sheets that is underway is still a source of restraint of consumer spending in the quarters ahead.
Industrial production rose 0.4% in September, following a setback in August (-1.4%) and a 0.5% increase in July. These numbers translate into the first quarterly decline of industrial production since the recovery commenced. Ditto for manufacturing output (which excludes mining and utilities from the total industrial production index), with the third quarter’s 0.9% decline as the first in three years. The 0.2% gain in factory production included an increase in production of business equipment, a steady reading for consumer goods, and a 2.5% drop in auto production after a 5.1% decline in August reflecting a reduction in auto assemblies. The October ISM manufacturing survey painted an improved picture with the composite and new orders indexes suggesting an expansion in factory activity. This is good news but actual production numbers will confirm or refute the optimism of the October survey results.
The Consumer Price Index (CPI) shot up 0.6% in September after a similar increase in August. The chief culprit is higher gasoline prices followed by a smaller hike in other energy price measures. A part of the recent spike in gasoline has been erased and should result in a tame headline number in October. Food prices rose only 0.1% in September; food prices have moved around a very narrow range of 0.0-0.2% during the past twelve months. The impact of the recent drought is not visible in retail food prices as yet. Excluding food and energy, the core CPI rose only 0.1%, matching gains seen in July and August. During the three months ended September, the large increase in the energy price index has resulted in a sharp jump of the headline inflation number. The core CPI advanced only 1.2% in the last three months, the smallest increase since December 2010.
Of note, in September, clothing was more expensive (+0.3%), medical care prices moved up (+0.3%), airfares were higher, and prices of new and used cars declined. Details of the CPI report also show a small acceleration of the shelter index (+0.2% in September) in the last three months, reflecting higher rental costs and owners’ equivalent rent. Shelter is the largest component of the CPI in terms of relative importance of items included in the basket of goods and services. On a quarterly annualized basis, the shelter price index has held steady (+2.0%) in the last two quarters. Inflation is not the primary concern of the FOMC at the present time, but an upward trend in core price items could quickly modify market perceptions about timing of policy tightening – a remote issue, for now.