Thursday, April 15, 2010

This Week's Data: Confirming the Pattern

This week's plethora of economic reports so far confirmed a pattern that has become the hallmark of this economic recovery: a healthy rebound in consumption, with a manufacturing sector almost on fire, and still potent disinflationary forces at work.

Both the deterioration in the international trade deficit to -39.7 billion in February (largely the result of a sharp increase in imports) and the spike in retail sales last month (+1.6% overall, with ex-autos up +0.6% and solid gains in most key categories) reflect the somewhat counterintuitve pick-up in consumer spending in Q1, despite the stubbornly high unemployment rates. Retail sales are now up a dazzling 7.6% from a year ago, although the comparison is admittedly skewed to the upside due to the fact that the economy was still sliding around this time last year. The most potent driving forces of this renewed vigor in spending are pent-up demand from the recent recession and a surging stock market. At this point, personal spending is estimated to have grown at an annual rate of over 3% in the first quarter.

The solid pace of economic growth in a number of our key trading partners has helped fuel an impressive comeback of the manufacturing sector since the second half of 2009, which has already been consistently reflected in the monthly ISM numbers. The momentum of the sector was validated again this week by the strong gains in both the Empire State (31.9 from 22.9 in March) and Philly Fed (20.2 from 18.9 in March) surveys for April. Today's industrial production gain of only 0.1% for March disguises a robust increase of 0.9% in the key manufacturing component of the report and is largely the result of a plunge in utilities output by 6.4%. Inasmuch as the 0.9% rise in manufacturing output may, in part, reflect a payback for the possible adverse effect of weather patterns in February, the series has still averaged a very healthy gain of 0.6% in the last two months.

Fully supporting Bernanke's reiteration this week of the "extended period" expression in regards to Fed policy, the March CPI confirmed the prevalence of persistent disinflationary forces in the U.S. economy. The flat core CPI for the month has now left the 6-month annualized rate of that measure at only +0.6%, with the 3-month version of the series at an attention-getting -0.2%. With an abundant amount of slack in the economy remaining to be absorbed, the risk is that, if anything, core inflation may dip lower still in the months ahead from its current 1.1% year-on-year. This should be kept firmly in mind, as the bond market enters a period where the monthly payroll gains gather some steam.

As for the rise in the initial claims data, the report was probably, by the BLS's own tacit admission, too distorted by the Easter holiday, to be meaningful.

The recovery is moving along at a respectable, albeit, somewhat uneven pace. The net of it all is that growth is on a 3.5% to 4% path that should put to rest any lingering doubts as to the self-sustainability of the recovery, and, at the same time, the inflation outlook should help contain any bouts of market anxiety over the risk of Fed tightening this year.

Anthony Karydakis

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