Article #2

Retail Sales Suggest Economy
May Be Stronger Than Expected
Wholesale Prices Surge on Energy


By JEFF BATER and BRIAN BLACKSTONE
December 13, 2007 10:51 a.m.

WASHINGTON — U.S. retail sales surged during November, making a surprisingly strong, broad-based climb that suggests the economy might not be as weak as feared. Meanwhile, U.S.wholesale prices soared last month at their fastest pace since the Nixon Administration, spurred by record gains in energy prices.

In a worrisome sign for Federal Reserve officials, price pressures appeared to seep beyond just energy and risk becoming embedded deeper in the production pipeline. Retail sales increased by 1.2%, the Commerce Department said Thursday. Sales went up an unrevised 0.2% in October. The median estimate of 10 economists surveyed by Dow Jones Newswires was a 0.6% advance in November. Analysts have been expecting consumer spending — and the economy as a whole — to slow sharply in the final months of 2007 compared to the third quarter because of falling home prices and rising energy costs.The retail sales report illustrates where Americans are spending their money. Consumer spending is a big part of the economy. It makes up about 70% of gross domestic product, which is the scoreboard for the economy. The Commerce report showed automobile and parts sales decreased by 1.0% in November. October sales fell 0.6%. Sales of all other retailers excluding auto and parts dealers surged in November by 1.8%; economists expected a 0.7% increase. The 1.8% gain was the largest since 2.9% in January 2006. Ex-auto sales in October had gone 0.4% higher, revised from a previously estimated 0.2% increase. November gasoline-station sales increased by 6.8%, likely boosted by higher prices at the pump. The gain was the biggest since 7.1% in September 2005. Gas sales rose 3.1% in October. Stripping away sales at gas stations, demand at all other retailers increased 0.6% in November. Excluding gas and auto sectors, demand at other retailers last month increased by a robust 1.1%. Sales climbed by 2.5% at electronic stores; 0.6% at health and personal care stores, 1.0% at food and beverage stores; 1.2% at building material and garden supplies dealers; 2.6% at clothing stores; 0.3% at eating and drinking places; 1.9% at mail order and Internet retailers; 1.0% at furniture store sales; 2.2% at sporting goods, hobby and book stores; and 0.9% at general merchandise stores. Wholesale Price Surge The producer price index for finished goods jumped 3.2% in November, the Labor Department said Thursday, the biggest one-month rise since August 1973.The core PPI, which excludes food and energy, was up 0.4%, matching the biggest increase in one year. The figures doubled Wall Street expectations of a 1.7% rise in the headline index and 0.2% rise in the core, according to a Dow Jones Newswires survey. In the 12 months through November, wholesale prices rose 7.2%, the largest increase since November 1981. The core PPI was up 2% from a year ago. Though the consumer price index, due for release Friday, will give a broader view of the inflation landscape, the PPI data nonetheless serve as a warning that the recent disinflation trend may have come to an end at a time when the economy is softening. That, in turn, would make it tougher for the Fed to lower interest rates further to limit the economic fallout from the housing and credit crunch. The Fed on Tuesday lowered the federal funds rate for a third-straight meeting, by 25 basis points to 4.25%, but in an accompanying statement warned that some inflation risks remain. On Wednesday, it announced — with other major central banks — a series of measures aimed at boosting liquidity in credit markets. Thursday’s PPI release showed producer prices for energy swelled a record 14.1% last month versus October. Wholesale gasoline prices increased 34.8%, also a record. Food prices, in contrast, were unchanged on the month .Wholesale prices of passenger cars rose 0.6% last month, while those of light trucks jumped 2.3%, the biggest increase in one year. Computer prices provided one of the few offsets, falling 2.4% on the month. Deeper in the production pipeline, inflationary pressures accelerated. Prices of raw materials, known as crude goods, rose 8.7%, though excluding food and energy they fell 0.5%. Intermediate goods prices rose 3.7% overall and were up 1% excluding food and energy. Business Inventories Slow U.S. business inventories slowed to a crawl in October, suggesting companies might have cut back on stockpiling and created a restraint on the economy in the final months of 2007. Inventories increased by 0.1% to a seasonally adjusted $1.431 trillion, after rising in September an unrevised 0.4%, the Commerce Department said Thursday. Wall Street was looking for stockpiles to move 0.3% higher during October. The smaller-than-expected increase indicated businesses were reducing their building of inventories for fear of lower demand in the future. Because inventories are a component of gross domestic product, which is a measure of the economy, reduced stockpiling would translate to a drag on the economy in the fourth quarter. Demand in October, however, was solid, the data Thursday showed, with business sales increasing by 0.7% to $1.135 trillion. Sales also rose 0.7% in September; originally, September sales were seen up 0.6%. The inventory-to-sales ratio slipped to 1.26 in October from 1.27 in September, Commerce said. The gauge indicates how well firms are matching supply with demand. It measures how long in months a firm could sell all current inventories. Year over year, inventories grew by 3.2% since October 2006; sales climbed 6.9%. October manufacturing sector stockpiles of goods increased 0.1% after rising 0.6% in September. U.S. wholesalers’ inventories were unchanged after increasing 0.6% in September. Retailers’ stocks of goods increased by 0.4% after rising 0.1% in September. Auto dealer inventories decreased 0.4% after falling 0.2% in September. Excluding the auto component, other retail stocks climbed 0.7% in October after rising 0.2% in September. Inventories rose by 0.5% at food and beverage stores; 2.1% at furniture outlets; 0.4% at general merchandise stores; and 1.1% at building materials, garden equipment and supplies stores. Inventories fell by 0.1% at clothing stores. Jobless Claims Decline The number of U.S. workers filing new claims for unemployment benefits fell slightly last week, remaining at levels consistent with modest increases in monthly payrolls. Initial claims for jobless benefits fell by 7,000 to 333,000 after seasonal adjustments in the week ended Dec. 8, the Labor Department said Thursday. Wall Street economists had expected no change from the previous week. There were no special factors, a Labor Department analyst said. The four-week average of new claims, which economists use to smooth out weekly volatility, fell by 2,000 to 338,750. The previous four-week average was the highest since October 2005, so the underlying trend still signals some softening in labor markets. Claims for the week ending Dec. 1 were revised up by 2,000 to 340,000.Last week, the Labor Department said hiring among nonfarm businesses grew 94,000 in November, leaving the jobless rate at an historically low 4.7%. The latest jobless claims data suggest similar modest gains in December, which should support consumer spending and ease concerns of a steep economic downturn or outright recession. According to the Labor Department report Thursday, the number of workers drawing unemployment benefits for more than one week rose 38,000 to 2,639,000 in the week ended Dec. 1. But the four-week average of those continuing claims rose a seventh-straight week to its highest level since January 2006, suggesting it is taking longer for unemployed people to find work. The unemployment rate for workers with unemployment insurance held steady at 2% in the Dec. 1 week. On an unadjusted basis, California reported the biggest increase in new claims the week of Dec. 1, 16,867, due to layoffs in the service industry. California didn’t provide specifics about any effect of the writers’ strike on claims. Wisconsin reported the sharpest decrease, 6,390, due to fewer layoffs in construction, service and manufacturing companies.

My surmise:


In conjunction with my previous article with respect to the Fed’s expansionary monetary policy may show why macroeconomic models are so hard to simplify. The Fed did lower the target rate a ¼ point, but only cut the discount window by the same. Wall Street proceeded in typical knee-jerk fashion and sold like crazy because most did not agree with the policy. The Fed then countered with a fairly unprecedented policy that included several other foreign banks injecting reserves into the system much do the delight of the banking system. However, this article shows why the Fed may have been so tentative to relinquish their grip on the discount window rate. As described, the retail sector saw enormous growth due to holiday spending. This shows that the consumer is still spending and goes along with the increase to C. Unfortunately there are other factors plaguing this expansionary policy. The PPI rose by leaps and bounds due to a dramatic increase in energy prices. Even the core PPI which excludes price changes in energy and food saw an increase matching the year’s high. Businesses haven’t help out much. They saw an increase in orders, but most did little to affect their inventories thus contributing to future price increases. Granted, there was an expected slow down in D, but now that there isn’t, the lack of inventories will add to pricing. However, if businesses increase their production and restock inventories to surpass demand we may see the expansion we need. Labor markets are softening so they had better react quickly. This would lead to an increase in Ip and help stabilize the expansion. Unfortunately for “Big Ben” this news on inflation comes at a bad time. He is limited to cutting the interest rate due to the increase in inflation. So the banking system will have to rely on this round of cuts and injected liquidity to deal with their credit issues before years end. We will see!!