He didn’t tell me how to live; he lived, and let me watch him do it. ~ Clarence Budington Kelland
That’s how I feel about my dad and hope that’s how my two wonderfull kids will feel about me. Happy Father’s Day to all my fellow dads! Now, on to the weekend economic wrap up.
Last week contained a number of reports on the economy covering the labor market, the consumer, inflation, and industry. And while each report contains individually contains useful data to measure the relative health of the economy, this past week also included an important report by the Federal Reserve on how it viewed current economic conditions.
Last Wednesday, the Commerce Department reported that retail sales rose a surpringly-strong 1.4 percent in May…the largest gain in sixteen months. The increase in May was led by a 3.8 percent rise in spending at gasoline stations, largely reflecting the continued rise in gasoline prices during the month. However, the closely-watched retail sales (excluding gas stations) rose a surprisingly solid 0.8 percent last in May.
This is data in nominal terms. The real growth rate in retail sales will be available once May consumer inflation becomes available next week. Even so, this report shows that the recent rise in gasoline prices has not had as harmful effect on consumer spending as initially thought.
Also on Wednesday, the Labor Department reported that import prices rose again in May! Increasing by 0.9 percent last month, the rise in May follows strong increases during the prior two months. Some of this increase was due to rising fuel costs, however, excluding fuel products, the price of imported goods rose by 0.4 percent in May — the fastest pace since last June. Over the past year, prices of imports (excluding fuel) have increased 2.3 percent.
Between 1996 and 2001, a period of the dollar’s appreciation, imports were generally deflationary. However, since the dollar began to realign in 2002, import prices have generally become inflationary. The good news is that they have not become excessively so. This has allowed the dollar to readjust without significant abrupt inflationary episodes.
More on the inflation front came out last Thursday, with a report on producer prices in May. The report showed that inflation at the producer level rose by 0.9 percent last month, following similar gains in prior months. The good news in the report is that core (excluding food and energy) producer prices rose by just 0.2 percen tin May.
Following two months of flat readings, the mild upturn in core producer prices in May suggests that depite the rise in import prices as well as fuel proces, the general inflationary picture at the procer level remains under control. Next week brings a much anticipated report on CPI in May, while the headline number may be strong due to energy prices, the May producer price report forshadows continued mild core inflation.
Also on Wednesday, the Federal Reserve released its Biege Book report on the state of the economy. With respect to the manufacturing sector, the report found:
Most Districts reported that manufacturing activity was up in the most recent period. Growth rates varied by industry group, however, and some Districts experienced little or no overall growth. Cleveland and Chicago reported stable conditions or little change in the manufacturing sector. St. Louis said manufacturing activity was mixed. Richmond is the only District that reported a decline in manufacturing activity. Some Districts (Philadelphia, Atlanta, Dallas, and San Francisco) mentioned that industries producing for the residential construction market were weak. On the other hand, four Districts–Boston, Philadelphia, Cleveland, and Chicago–mentioned that there was strength among machinery and equipment manufacturers. While several Districts mentioned capital spending plans, reports on capital spending from Philadelphia, Cleveland, and Kansas City were particularly positive. Both New York and Philadelphia noted that manufacturers were optimistic about growth over the remainder of this year. Manufacturers in Boston and Cleveland expected little change in activity.
Finally, on Friday, the Federal Reserve report on industrial production found that after an erratic six months of large ups and downs, industrial production showed no change in May. For the manufacturing sector, which accounts for more than three quarters of industrial output, production edged up 0.1 percent last month. While the fact that this was the first time since last August that manufacturing production increased for a third consecutive month, the tepid rise signals that a moderate acceleration from the sluggish performance of the past two quarters is in the making.
The housing downturn continues to have an adverse impact on certain industries, such as wood products, furniture and textile product manufacturing, none of which showed growth in output last month and have experienced significant declines in production over the past year.
At the same time, other sectors are experiencing robust growth. Aerospace, computer and electronic products, plastics products, and miscellaneous manufacturing, chiefly medical equipment, are all in a strong expansionary mode. At the same time, it appears that the primary metal sector, which experienced a significant decline in production in the second half of last year, is on the mend. Through the first five months of this year, output increased by more than 20 percent at an annual rate.
With some sectors are running hot and others rather cool, the overall state of manufacturing is luke warm. While most manufacturing sectors have increased production of the past year, the overall 2 percent pace is not a robust as in the 2004-2006 period. This trend will likely continue going forward, with manufacturing growing more in-line with overall GDP instead of outpacing the overall economy as it did in recent years.