Spark in Manufacturing Activity, Pick Up in Core Consumer Prices: What We Learned During the Week of February 15-19

Manufacturing had its largest single-month increase in activity since last summer (although the sector remains weak) while core consumer prices continue to pick up. Here are the 5 things we learned from U.S. economic data released during the week ending February 19.

#1Manufacturing output grew during January at its fastest pace since last July. The Federal Reserve estimates manufacturing output grew 0.5% during the month following 2 consecutive monthly 0.2% contractions. Even with January’s gain and because of the overall weak trends in the sector, manufacturing output was only 1.2% above year ago levels. Production of durable goods was up 0.5% while that for nondurables gained 0.4%. Among the sectors seeing the largest monthly gains in output include motor vehicles, food/beverages and chemicals while production fell for electrical equipment/appliances, apparel and printing. Overall industrial production increased 0.9% during January, its 1st monthly gain of at least 0.1% since last August and, as a result, the measure remained 0.7% below January 2015 levels. Mining output was unchanged following several months of sharp declines (think of slowing oil production) while the return of winter weather led to a 5.4% bounce in output at utilities. Factory usage increased during the month—capacity utilization increased 7/10ths of a point to 77.1%, its highest reading since October with utilization in manufacturing adding 3/10ths of a point to 76.1%.

#2Even as gasoline prices were in a freefall, core prices continued to firm in January. The Bureau of Labor Statistics reports that the Consumer Price Index (CPI) was unchanged on a seasonally adjusted basis during the month even though prices for energy goods fell 2.8% during the month. Prices for every major category of energy goods declined during the month, including fuel oil (-6.5%), gasoline (-4.8%), electricity (-0.7%) and utility delivered natural gas (-0.6%). Meanwhile, food CPI was unchanged during the month as price gains for food consumed away from home were counterbalanced by pricegraphic021916 drops for food consumed at home. Net of energy and food, core consumer prices grew 0.3% during January (its largest single-month gain in more than 4 years), and were 2.2% above year ago levels. Prices for core consumer goods gained 0.2%, led by increases for apparel (+0.6%), medical care commodities (+0.4%) and new vehicles (+0.3%). Prices for consumer services grew 0.3%, with price gains for medical care services (+0.5%), transportation services (+0.4%) and shelter (+0.3%). In all, the firming of core prices could give the Federal Reserve further impetus to push short-term interest rates at least once or twice sometime this year.

Meanwhile, final demand Producer Price Index (PPI) increased 0.1% in January, with the core index (net of food, energy and trade) growing 0.2%. The former was 0.2% below year ago levels while the 12-month comparable for the latter was at a still modest +0.8%. Wholesale prices for final demand goods dropped 0.7% for a 2nd straight month. This was largely because of the 5.0% decline in energy prices, with more of half of the drop tied to an 8.8% decrease in wholesale gasoline prices. Meanwhile, wholesale food prices increased 1.0%, its largest increase since last May as prices for fresh and dry vegetables surged 17.3%. PPI for final demand core goods (net of energy and food) was unchanged for the month. PPI for final demand services was up 0.5%, which includes a 0.9% jump for trade services (which measure margins at retailers and wholesalers).

 #3A measure of forward-looking economic measure declined for a 2nd straight month. The Leading Economic Index from the Conference Board lost 2/10ths of a point during January to a reading of 123.2 (2010 = 100, +2.2% vs. January 2015). Only 5 of 10 components to the leading index improved during the month, led by the interest rate spread, nondefense capital goods orders (net of aircraft) and hours worked in manufacturing. Pulling down the index were (among other things) lower stock prices and a recent hike in jobless claims. The coincident index added 3/10ths of a point 113.2, with all 4 index components gaining during the month. The lagging index grew 1/10th of a point to 120.0 with 5 of 7 components making a positive contribution to the index. As the Conference Board links much of the decline in the leading index to the aforementioned drop in stock prices and the recent hike in jobless claims (which has since cooled), the press release stated that recent trends in the measure do not “signal a significant increase in the risk of recession.”

Housing starts slowed for the 5th time in 7 months during January, but remains at a healthy pace (at least by post-recession standards). According to the Census Bureau, housing starts were at a seasonally adjusted annualized rate of 1.099 million units, down 3.8% from December but still 1.8% above the January 2015 pace. Starts of single-family and multi-family units fell during January by similar percentages (-3.9% and -3.7%, respectively) while overall starts fell in all 4 Census regions. Looking forward, the SAAR of issued housing permits slipped a modest 0.2% during the month but were a healthy 13.5% ahead of the pace of a year earlier at 1.202 million units. Permits for single-family units declined 1.6% during the month while those for multi-family homes gained 2.1%. The annualized count of completed homes was at 1.057 million units, up 2.0% for the month and 8.4% from its January 2015 pace.

#5Homebuilder sentiment slips slightly in February. The Housing Market Index, from the  National Association of Home Builders, lost 3 points to a reading of 58, its lowest mark since last May. Even with the drop, this was the 20th consecutive month in which the measure of homebuilder confidence surpassed a reading of 50, meaning more builders saw the housing market as “good” as opposed to being “poor.” The HMI fell in all 4 Census regions but remained above the critical reading of 50 in 3 of 4 regions (the Northeast being the exception). Also dropping were indices for current sales of single-family homes (off 3 points to 65) and the traffic of potential buyers (down 5 points to 39). The index for expected sales over the next 6 month inched up a point to 65. The press release noted that homebuilders were largely positive about market conditions, partially attributing the drop in the HMI to “the high cost and lack of availability of lots and labor.”

Other data released over the past week that you might find of interest:                       
Jobless Claims (week ending February 13, 2016, seasonally adjusted): 262,000 (-9,000 vs. previous week; -23,000 vs. same week a year earlier). 4-week moving average: 273,250 (-4.0% vs. same week a year earlier).
Mortgage Delinquencies (4th Quarter 2015, Percentage of Residential Mortgages that Are Delinquent, seasonally adjusted): 4.77% (-22-basis points vs. 2015 Q3, -91-basis points vs. 2014 Q4).
FOMC minutes (from January 2016 meeting)

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.

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