Deller's two cents:  Christmas came early in terms of positive economic news.  Things are finally looking up across the board.

 

Economic Week in Review: The recovery appears to gain traction

December 17, 2010

The week's news suggested that the economic recovery is gaining traction. Retail sales were up for the fifth consecutive month, and an index of leading economic indicators looked bullish. At the same time, inflation remained dormant as the Federal Reserve reiterated its plan to continue purchasing Treasury securities to support the recovery. Meanwhile, President Obama signed a broad tax package that, among other things, extends tax cuts enacted during the George W. Bush administration and includes a one-year reduction of the Social Security payroll tax, a measure intended to spur the recovery in 2011. For the week ended December 17, the S&P 500 Index rose 0.3% to 1,244 (for a year-to-date total return of about 13.7%). The yield of the 10-year U.S. Treasury note increased 1 basis point to 3.33% (for a year-to-date decrease of 52 basis points).

Consumers are picking up the pace

Heading into the crucial holiday shopping season, consumer spending continued to increase. Retail sales were up for the fifth consecutive month in November, rising 0.8%, a bit above expectations. In addition, the October gain was revised upward to 1.7%. Excluding autos, the number was even more robust at 1.2%. On a 12-month basis, retail sales were up 7.7%, the third straight month of year-over-year growth at or near 8%. In fact, sales grew at a 13.7% annualized pace over the past four months, bringing retail sales near the same level as their November 2007 peak.

9 of 10 leading indicators point up

The nation's economic dashboard is showing more positive signals lately-a trend confirmed by The Conference Board on Friday, which said that its index of leading economic indicators rose 1.1% in November. Nine of the survey's ten components increased; the only drag was building permits. The index, which consists of ten financial- and consumer-related indicators, accelerated at an annualized rate of 8.6% during the past three months, its fastest growth rate since March. The six-month annualized rate increased to 4.4% from 3.1%. "November's sharp increase, the fifth consecutive gain, is an early sign that the expansion is gaining momentum and spreading," said Ataman Ozyildirim, economist at The Conference Board. "Continuing strength in financial indicators is now joined by gains in manufacturing and consumer expectations, but housing remains weak."

Consumer prices barely budge

Inflation as measured by the Consumer Price Index (CPI) continues to crawl along at a snail's pace. Consumer prices inched up 0.1% in November, and for the 12-month period rose only 1.1%. Energy costs, which had surged 2.6% in October, rose only 0.2% in November. Excluding the more-volatile food and energy categories, the core price index logged the same 0.1% rise for the month after holding at 0% for three consecutive months. For the past 12 months, the core CPI has risen only 0.8%, showing that sellers of goods and services, while experiencing modest inflation as measured by the Producer Price Index (see below), are not passing along increased costs to consumers.

Wholesale energy and food prices rise modestly

While consumer prices are barely moving, wholesale prices rose a bit more than expected in November, as producers are paying more for energy and food. The Producer Price Index (PPI)-which measures how much manufacturers and wholesalers pay for goods and materials-was up 0.8% for finished goods. A big part of the increase came from energy costs-mostly gasoline and other fuels-which rose 2.1% for the month. A 1.0% increase in consumer foods also contributed to the advance. Meanwhile, the core PPI-excluding food and energy prices-was up a more modest 0.3%, after dipping 0.6% in October. The rebound was attributed to passenger cars, which slipped 3.0% in October but rose 1.7% last month. For the last 12 months, the core PPI has been quite tame, rising only 1.2%.

Restocking of inventories slows a bit

U.S. business inventories were up 0.7% for the month of October, lower than the expected 1.0% gain. However, the previous month's 0.9% reading was revised upward to 1.3%. The October number was the lowest since June, suggesting businesses are slowing the pace of inventory building, which could be a modest drag on GDP growth into next year. Since the middle of 2009, inventories have added an average of 1.7 percentage points to GDP. If the stockpiling continues to slow, demand from end users will have to make up the difference for the recovery to continue.

Industrial production shows some strength

Industrial production rose 0.4% from October to November, with manufacturing production rising 0.3%. Excluding motor vehicles, the manufacturing increase was 0.7%, the highest reading since May. The numbers were encouraging, given that the previous month's industrial output was revised downward from zero to -0.2%. Also encouraging: Industrial capacity utilization edged up to 75.2% from 74.9%, reaching its highest level in two years. Output from utilities, which fell 3.7% in October because of warmer-than-usual weather, rebounded with a 1.9% gain.

Upward turn in new housing construction

The initiation of new-home construction rose 3.9% in November to an annual rate of 555,000, slightly higher than expectations. The corresponding number for October was revised upward to 534,000. Single-family construction showed some strength, rising 6.9%. However, multifamily starts declined 9.1%. While the upward tick is welcome, the housing market remains quite lethargic by historical standards, with total housing starts down nearly 6% from last year's sluggish pace. Housing permits, an indicator of future construction starts, fell 4.0% in November and are down 14.7% from a year ago.

Fed stays its course

At the December 14 meeting of the Federal Open Market Committee, the central bank confirmed that it will continue with its plan to purchase $600 billion of longer-term Treasuries by the second quarter of 2011. The program is designed to prevent deflation and support the economic recovery. The FOMC reiterated its view that progress toward its twin objectives of price stability (generally seen as a steady annual inflation rate of around 2%) and a higher employment rate "has been disappointingly slow." The FOMC's statement cited modest income growth, high unemployment, lower housing wealth, and tight credit as constraints. However, the committee did note that consumer spending is "increasing at a moderate pace," compared with "increasing gradually" in its previous statement. As it has since June 2009, the committee again said that it will keep the fed funds rate target in the 0% to 0.25% range "for an extended period."

The economic week ahead

Next week's highlight will be Wednesday's release of the updated third-quarter gross domestic product estimate. Other news will include the latest on existing-home sales (Wednesday) along with durable goods, personal income, and new-home sales (Thursday).

--
Steven C. Deller
Professor and Community Development Economist
Department of Agricultural and Applied Economics
515 Taylor Hall --- 427 Lorch Street
University of Wisconsin-Madison/Extension
Madison, WI 53706
608-263-6251
"I started out with nothing and I have most of it left."
Seasick Steve