Reflecting for a 2nd month the influence of the Japanese earthquake/tsunami on the auto sector, May Industrial Production rose just .1% after an unchanged report in April. Estimates were for a gain of .2% and Capacity Utilization totaled 76.7%, below expectations of 77%. Auto production specifically fell 1.5% in May after a 6.5% drop in April. Motor vehicle capacity utilization fell to 61.6% from 62.6%, the lowest since Dec. Ex the auto sector, manufacturing production rose by .6% led by machinery, computer/electronics and mining production.
The June NY manufacturing Fed survey, the 1st June figure seen, fell from 11.9 to -7.8, well below expectations of +12.0 and the worst reading since Nov. New Orders, Shipments and the Average Workweek all went negative and Backlogs fell from 9.7 to 0. Employment fell 14 pts to +10. Prices Paid fell almost 14 pts and Prices Received was down by 26 pts. Also reflecting concern, the overall 6 month outlook fell significantly to 22.5 from 52.7, the lowest since Mar ’09. Bottom line, while a big disappointment, we need to see the other regional survey’s to confirm that the May moderation continued into June which I think is most likely. There is no question that Japan is having an impact from a supply perspective but there is also growing concern with end demand.
Consumer prices rose .2% headline and .3% core, both .1% above expectations and the y/o/y headline rise is now 3.6% from 3.2%. The consensus was 3.4% and its the highest since Oct ’08. The core rate is up 1.5% y/o/y, the most since Oct ’10. Energy prices fell in May but the headline figure was buoyed by food prices instead which rose .4% m/o/m. Also adding to the inflation was a large 1.2% rise in apparel prices as the rise in cotton prices works its way thru the chain. Owners Equivalent Rent, a large component of CPI, rose just .1% and still doesn’t reflect the falling vacancy levels in apartments. Vehicle prices rose a big 1.1%, both new and used as less supply from Japan was the likely influence. Commodity prices, 40% of CPI, rose .1%. Bottom line, high commodity prices are filtering into consumer prices even without any US wage pressures which the inflation doves have been hanging their hat on. Wage pressures though are being felt here via China. The inflation data also makes the Fed’s job that much more difficult as stagflation is now a growing reality and the flation part ties the hands of the Fed to react with more easing. As many of us believe though, the more easing has added to the flation so maybe less will tame it.