Economic data

In contrast to the improvement seen in the ABC confidence poll this week, the 1st look at Jan UoM was light at 72.7 vs expectations of 75.5 and down from 74.5 in Dec. The drop was solely led by a decline in the Current Conditions component which fell 5.5 pts to a 3 month low but the Economic Outlook rose .7 pts to the best since June ’10. Of particular interest, one year inflation expectations rose to 3.3% from 3.0% to the highest since Oct ’08.

Dec IP was stronger than expected, up .8% vs the forecast of up .5% BUT utility output was the main factor (likely due to the very cold weather/storms in Dec), rising 4.3%. Manufacturing production, taking utilities out, rose by .4%. The production of motor vehicle/parts fell .2% but machinery, mining and computer/electronics all saw gains. Capacity Utilization rose to 76% from 75.4%, the highest since Aug ’08 but also was led by a sharp jump in the utilization of utilities to 82.3% from 79%. Manufacturing capacity rose to 73.2% from 72.9%. Bottom line, notwithstanding the utility output boost to overall IP, manufacturing IP is still running at a good pace, now up 5.8% y/o/y and certainly continues to be a main contributor to economic activity.

Dec Retail Sales ex auto’s and gasoline were up .4%, .1% above expectations but Nov was revised down .2% to a gain of .6%, thus taken together, it was a touch light. Both headline sales and ex auto’s were .2% below forecasts. Looking at true core Retail Sales which also takes out building materials, sales rose just .2% but comes after an .8% gain in Nov. Electronics sales fell for a 3rd month and clothing sales fell .2% (but after 2% rise in Nov). Furniture, sporting goods, restaurant/bars and online retailing all saw gains in sales. Department stores were soft, falling 1.9% after a 2.8% rise in Nov. Bottom line, after already seeing Dec vehicle sales and Dec retail comps, this data isn’t as fresh for the markets. Looking forward, we’ll see if higher food and energy prices, amongst other things, will be matched by job gains and wage increases to cushion the impact.

The Dec CPI index both headline and core have hit record highs. Thus, our absolute cost of living has never been greater. The rate of change Dec headline CPI rose .5% m/o/m vs expectations of up .4%, the most since June ’09 while the core rate was in line, up .1%. Y/o/Y CPI is now up 1.5%, the highest since May while the core rate is up just .8% y/o/y. Energy led the headline gain with a 4.6% rise as food prices were up just .1% which likely won’t last. OER, 24% of CPI, was up just .1% and is another key to watch over the next 6 mo’s to the upside as apartment vacancy rates fall. Apparel prices rose just .1% and we’ll see going forward how much pricing power co’s have with the sharp rise in cotton prices. Bottom line, with the record high in some commodity indices, we’ve hit a point where inflation is here and while the Fed only cares if it spills into higher consumer prices, wholesale inflation matters to company profit margins.