There were several important reports on the U.S. economy released this morning. First, data from the Bureau of Labor Statistics (BLS) showed that wholesale inflation pressures in America firmed last month, as the producer price index for final demand (PPI-FD) rose by 0.4 percent. That was the largest monthly gain since June and twice the increase economists had expected. Cheaper energy costs were largely offset by a jump in food prices last month, which is why “core” PPI-FD also rose by 0.4 percent in November. Regardless, both headline and core measures of wholesale inflation have been trending upward this year, and their annual rates of growth are now near the highest levels of the recovery. With price pressures rising in the production pipeline, it is likely that the higher costs will eventually be passed on to consumers. Moreover, the measure of healthcare services costs rose by 0.2 percent last month and is now up 1.7 percent on a year-over-year basis. This particular PPI component is worth paying attention to because it is used in the measure of overall U.S. inflation preferred by the Federal Reserve, i.e. the Personal Consumption Expenditures (PCE) core price index, due out next week.
Next, a report from the U.S. Census Bureau showed that advance estimates of retail and food services sales for November totaled $465.5 billion. That was a 0.1 percent increase from October’s downward-revised print and a much smaller gain than anticipated. A 0.5 percent drop in motor vehicle sales weighed heavily on the headline index last month but even retail sales excluding the volatile autos and gasoline components rose by less than expected (0.2 percent) in November. There was a solid gain in furniture and home furnishing sales, perhaps related to the recent positive data out of the housing market. However, department store and sporting goods sales were weak last month, especially considering the sharp uptick in consumer sentiment seen after the election. Even growth in the nonstore retail arena, e.g. Amazon, moderated last month, although shoppers’ mounting preference for online commerce remains undeniable. Overall, though, this was a disappointing report, which should cause analysts to lower their estimates for fourth quarter U.S. gross domestic product (GDP) growth. What is worse is that retail sales could face additional headwinds going forward if wage growth does not accelerate.
Elsewhere, data from the Federal Reserve Board of Governors showed that industrial activity in America slowed last month, with total production declining by 0.4 percent. That was even worse than the 0.2 percent drop economists had anticipated but October’s gain was revised slightly higher. Under the hood, most measures of production deteriorated last month, with utilities again being a notable weak spot due to the unusually warm winter (less heating demand). More importantly, overall U.S. industrial activity on a year-over-year basis has now declined for the 15th month in a row, a pattern rarely seen outside of a recession. Manufacturing, which makes up roughly 75 percent of all industrial production, fell by 0.1 percent in November, and capacity utilization, sometimes used as a leading indicator of inflation and potential output, slid to 75.0 percent last month, the weakest reading since March and well below the long-term average.
Sources: Econoday, Bloomberg, Twitter, ZH, U.S. DoL, U.S. Census Bureau, FRBG, FRBSLPost author: Charles Couch