Fed makes plans amid ominous outlook
In a heavy week for economic and market news, rising energy prices and a slumping housing market continue to plague the economy. Federal Reserve Chairman Ben S. Bernanke said a temporary fiscal-stimulus program could help the U.S. avoid recession and suggested further rate cuts by the Fed will be necessary. Concerns of a recession were also felt on Wall Street. For the week, the S&P 500 Index plummeted 5.4% (for a year-to-date total value of –9.67%), and the yield of the 10-year U.S. Treasury note dropped 16 basis points.
Producer Price Index (PPI) falls slightly
Producer prices dipped 0.1% in December following November's 3.2% surge, according to the Labor Department. The cost of energy goods accounted for the entire decline. Core producer prices—excluding energy and food—climbed 0.2% for the month. Wholesale gasoline prices dropped 4.8% in December after November's 34.8% spurt. Producer prices rose 6.3% in 2007, largely due to more expensive energy and food goods.
Retail sales sputter
The Commerce Department reported retail sales fell a seasonally adjusted 0.4% in December, the first decline since June. November's number was downwardly revised to 1.0% from 1.2%. Sales were up 4.1% from December 2006 and 4.2% for the year. Excluding gasoline and autos, sales dropped 0.2%. Considering November's and December's sales together, growth has been moderate in a fundamentally weak environment.
Sales climb faster than inventories
The Commerce Department announced November's business inventories rose 0.4% on strength from the manufacturing and wholesale sectors. Seasonally adjusted business sales increased 1.6% from October and 8.7% from November 2006. The total business inventories/sales (IS) ratio dropped to 1.24 as sales grew faster than inventories. Manufacturing, wholesale, and retail sales were all up. However, slow December sales indicate retailers will hold back on inventory accumulation.
Energy prices fuel CPI
The Consumer Price Index (CPI) climbed 0.3% in December on a seasonally adjusted basis, according to the Labor Department. About one-third of the CPI's seasonally adjusted rise was due to a 0.9% increase in the index for energy. The core goods CPI, which excludes food and energy prices, rose a seasonally adjusted 0.2% from a month ago and 2.4% at a 12-month rate. For 2007, the CPI increased 4.1% as energy prices gained 17.4% and food prices rose 4.9%.
Industrial production steady
The Federal Reserve Board reported industrial production was unchanged in December after November's 0.3% increase. Economists had expected a 0.5% drop. Manufacturing output was also flat after a 0.3% rise in November. Utilities output declined 0.2% in December because of a drop at gas utilities, and output of mines grew 0.1%. Capacity utilization dipped from 81.6% to 81.4% in December, while manufacturing utilization sank to 79.7%.
Beige Book displays some gray
The Beige Book, the Federal Reserve's anecdotal survey of regional economies, reported an economy that was slowing but still had room to grow this year. The release was based on economic conditions from December and late November. Much of the gloom stemmed from the housing and retail markets, and consumer spending and borrowing were weak after disappointing holiday sales. On the positive side, the weak dollar stimulated tourism, retail sales to foreign visitors, and certain exports. Also, the energy sector remained strong and labor markets held steady.
Weakness continues in housing industry
The Commerce Department revealed that December housing starts declined 14.2% below the revised November estimate and 38.2% below the revised December 2006 rate. Construction was at its slowest pace in 16 years, and starts fell in all four of the nation's regions. For the year, housing starts decreased 24.8%. Housing completions dropped 7.7% in December, permits for new housing skidded 8.1%, and the number of units under construction dipped 1.2%. The National Association of Home Builders' index of builder optimism reached record-low levels, although there was hope that further rate cuts by the Federal Reserve Board would stimulate the sector.
Economic indicators drop again
The Conference Board's index of leading economic indicators, a potential measure of future economic performance, dropped 0.2% in December. The index, which has declined three straight times and four times in the last six months, hit its lowest level since September 2005. Six of the index's ten indicators fell in December. Building permits were the greatest detractor, while vendor performance was the largest positive contributor. Since December 2006, the index has fallen 1.4%.
The economic week ahead
The only report scheduled for next week is Thurday's release on existing-home sales.
