Consumer Price Index Shows Slowing Inflation
Consumer prices increased 0.2% in May, as I suspected. Price increases are down nicely from the 0.5% level experienced in February and March.
Energy-related categories are the only ones that showed outright declines. Price increases moderated (not declined) for restaurants, some medical categories, and transportation. As I suspected, both new and used auto prices increased sharply as dealers raised prices on existing inventory. I believe the sharp 1.1% increase in new auto prices was the main thing some economists missed when they were predicting no inflation in May. I think prices should moderate as the Japanese transplants come back online this summer and perhaps offer incentives to get buyers back in the showroom.
Apparel prices jumped 1.2% as manufacturers began to pass along some of the increases in basic commodities like cotton. However, like groceries and autos, the higher prices of clothes caused relatively anaemic demand at the retail level. Clothing volume (not sales dollars) likely showed a decline in May based on retail sales growth of 0.1% and clothing inflation of 1.2%. Hotel prices also jumped a surprising 2.9% as it appears that business demand for hotel space continues to expand.
The prognosis for the consumer price index in the months ahead looks good as gasoline prices and oil have continued to fall in June. Food prices also seem to be abating, too, especially fresh fruits and vegetables. With new crops coming in this summer, Russia lifting its export ban, and now the possibility that corn-based ethanol products will lose their subsidies, the price news going forward should be better. Auto prices should also begin to move down as Japanese production comes back in the months ahead. A silver lining in recent home price declines is that the weakness has kept rent increases lower than what I might have suspected.
Consumer Financial Obligations Ratio Improves Again
One consumer metric that I follow closely is the financial obligations ratio, which compares consumer financial payments to income. The Federal Reserve updates this series once a quarter and just updated it with the first-quarter report on Friday. Obligations measured include mortgages, rents, car payments, lease payments, credit cards, and other loan payments. This ratio peaked at almost 18.9% of income in 2007 and has subsequently dropped to 16.4% for the first quarter of 2011, its lowest level since 1994 and below the 30-year average of 17.2%.
The series low was 15.7% in 1981 and has been as high as 18.9%. The ratio is down nearly 1% from a year ago, providing yet another source for consumer spending growth. A combination of income growth, lower interest rates, and lower loan balances is responsible for the dramatic improvement. Since most of the debt is fixed rate mortgages, and as incomes continue to rise, I believe the ratio could make a run at its all-time low over the next year or two.
While many economists continue to focus on underwater homeowners and their ability to draw down home equity loans, it cannot be forgotten that new homeowners are spending substantially less than the last generation did on their mortgage payments. Remember that since the crisis began (2007) more than 20 million homes out of a base of very roughly 75 million homes have changed hands at reduced prices with lower interest rates. Each year the proportion of homeowners with cheap homes and low interest rate loans continues to expand.
Industrial Production Looks Flat, but Let's Peer Beneath the Surface
Although Industrial Production grew only 0.1% from April to May (and was basically unchanged between March and April), manufacturing, excluding autos, grew a more robust 0.6%. The volatile utility sector, which has been down four of the last five months, is really taking its toll on the index. Some combination of weather, greater energy efficiency, and weakening business demand seem to be weighing on the utility data. For May utilities were down 2.8%, weighing down the overall industrial production index. The manufacturing portion of industrial production, excluding the negative utility results and the positive mining numbers, presents a more positive picture
Manufacturing Bounces Back
Tornadoes throughout the South, a major manufacturing region, explain a significant portion of April's weakness. May and especially April were also strongly affected by reduced auto production by Japanese transplant manufacturers.
Last week we talked about overall auto production, and this week I want to show the data by manufacturer so readers can see just how dire the situation became, especially for Toyota (TM). Final data for May just became available, and I am estimating June data based on this week's production data and mechanically converting it to monthly data. I am very hopeful that the second half of the month will look better and that the table below represents a worst-case scenario.
By Category, Manufacturing Looks to Be Strengthening
Outside of autos, only a few categories showed much weakness. Food and tobacco (a relatively large category), electrical equipment (a smallish category), and printing and wood products (tiny categories) all showed declines. Furniture, petroleum products, machinery, computers, and textiles all grew faster than 1%, some significantly so.
Regional Purchasing Managers' Reports Look Weak
Poor auto-related data may also explain great deal of the weakness in two regional purchasing managers' reports last week that upset the market. Both the Philly Fed and Empire State reports moved into negative territory for the month of June. Those two regional reports bode poorly for the national report at the beginning of next month. That may upset the market further, especially if the report shows a drop below 50.
Housing Starts Show Modest Increase, but Not Enough to Be Excited About
Eric Landry, our housing analyst, summed up last week's housing data as follows:
Total starts in May increased 3.5% from April levels on a seasonally adjusted basis (SAAR), but remained 3.4% below year-ago levels. The increase was driven by an 8.9% sequential increase in five-plus unit structures and a 3.4% increase in single-family starts. Regionally, the West was the big winner, with an 18% sequential increase in its SAAR, while the North and Midwest both declined midsingle digits. Permits performed more impressively, with total permits issued increasing 8.7% from April's SAAR and up 5% from the year-ago period. Five-plus units drove the results, gaining 15% against April and 28% against last year's period. As we've mentioned many times before, we wouldn't get excited until both permits and starts broke out of their narrow range, or something arose that indicated such would happen in the not-too-distant future. April's results are a step in the right direction as they have ticked up from very anaemic levels, but are far from indicating any kind of an uptrend.
