From: Gregory S. MacKay, Senior Vice President & Chief Economist
Last week’s minutes from the March FOMC meeting showed both the staff and the participants mainly in agreement on inflation levels. While there was some discussion by the participants that ongoing quantitative easing might contribute to inflation in the future, both staff and FOMC members saw little concern about inflation levels over 2% before 2015. The most recent data from the Bureau of Labor Statistics confirms that view. Wholesale inflation (P.P.I.) for March fell .6%, and is running at a non-threatening 1.1% for the past twelve months. Core wholesale inflation was unchanged at a .2% increase, as declines in energy costs offset rising food prices. Energy declines were more evident in intermediate and crude goods prices, falling 4.7% and 8.5%, respectively, for the month. For the past twelve months, both crude and intermediate prices on the wholesale level have been negative. Simply put, without some real energy problems, there is no wholesale inflationary problem, supporting the Fed’s view.
At the retail level, the C.P.I. for March looked similar. For March, all consumer items fell .2% in cost, and are up only 1.5% in the past twelve months. Without food and energy, consumer inflation was .1% in March and up 1.9% for the past twelve months. As on the wholesale level, energy remains the wild card, with gasoline down 4.4% for the month and down 3.1% for the past year. Rent, transportation, and medical care have all risen more that the overall consumer average in the past year. The numbers confirm it, with 1.5% annual consumer inflation, the Fed will not have to back down on its easing programs.
Part of the results of this ongoing easing can be seen in varying housing data. For the first time since mid-2008, housing starts exceeded a one million annual rate. This rate is 7% better than February, and a monumental 47% better than year ago levels. There is an ongoing boom in apartment units, as demand remains high due to frightened buyers, reasonable prices on existing homes (though supply is low), and tougher mortgage standards. However, the growth in starts is good, and while March building permit levels were down a bit, permits were over 902,000, and 17% higher than March 2012. Housing is recovering, but still well below the solid levels of the 1990’s and (thankfully) well below the dangerous levels of the 2000’s.
Who said lousy weather is bad for business? While snowbirds groused about a cold March, a huge jump in utilities output offset small declines in manufacturing and mining. Construction was slowed by the weather, but consumer goods spending continued an increase seen in February. Factory usage for manufacturing and mines indicates more improvement can take place. Only mining remains above its long term average of capacity utilization. The message here is that these indicators also point to the ongoing slow-moderate growth levels to which we are accustomed.
Stock prices haven’t taken kindly to the slow global growth and mixed earnings news from U.S. companies. Prices have been buffeted all week. At 2:05 p.m., for the week and year:
There was little movement in bond yields this week, as ongoing low inflation cancelled out jitters about stock prices.