Initial jobless claims higher after first of the year
- Initial claims for unemployment insurance benefits rose 11,000 to 261,000 in the week ended January 6. This is the fourth consecutive increase, amounting to a 36,000 rise over the past four weeks.
- Claims are volatile, particularly around the holidays, and recent cold weather hasn’t helped. Colder than normal weather can boost new filings, and this is probably what recently occurred. Because of weather and seasonal adjustment issues surrounding the holidays, it's difficult to draw too much from the rise in initial claims.
- The four-week moving average in initial claims also rose, increasing 9,000 to 250,750. Despite rising for four consecutive weeks, the average remains historically low and confirms that the labor market is in good health.
- Overall, the U.S. labor market is well into its eighth year of expansion. During 2017, the economy created more than 2 million jobs, which is a very solid pace. Job openings remain abundant -- the quits rate is at a cyclical high as workers perceive that jobs are plentiful and are more willing to switch jobs. Also, hiring remains elevated.
So, do we have inflation or not?
- In the producer price report, the headline declined 0.1 percent in December, which is the first decline since August 2016. Weakness in December producer prices isn’t overly concerning and likely won’t have significant implications for monetary policy.
- For 2017, PPI increased 2.6 percent. This compares to an increase of 1.7% for 2016.
- Ex-food-and-energy, PPI weakened slightly in December, while the year-on-year rate increased 2.3%.
- Headline consumer prices increased by a modest 0.1% m/m in December, mainly due weakness in gasoline prices.
- Excluding food and energy, core prices increased by 0.3% m/m. Strength was broad-based. Shelter prices increased by 0.4%, while medical care prices increased by 0.3%.
- The gain in core consumer prices in December will reinforce
expectations of a Fed rate hike in March and supports the view that the Fed will increase interest rates by at least 75 bps this year.
- Much of the transitory weakness seen last year is now being reversed. Drugs prices increased by 1.0% last month. Used vehicle prices increased by 1.4% m/m due to the surge in demand after the hurricanes destroyed 300,000 plus vehicles.
- Overall, the core CPI inflation rate improved to 1.8%, from 1.7%, and base effects will keep it low during the first few months of 2018. However, the three-month annualized inflation rate increased to 2.5% and forewarns of higher inflation later in 2018. By spring, significant declines in wireless telephone services prices seen a year ago will drop out of the annual calculation and the core inflation rate will likely rebound above 2.0%.
Retail sales were strong, unless you actually owned a store
- It was a very good holiday shopping season except for department stores, electronics retailers, sporting goods stores and clothing stores. For Amazon and other non-store retailers, 2017 was the best year ever.
- Retail sales rose a solid 0.4 percent in December, and November was revised 1 tenth higher to what is a strong gain of 0.9 percent.
- Core readings (excluding autos and gasoline) were up 0.4 percent in December and 6 percent from a year earlier, which points to a solid consumer contribution to fourth-quarter GDP.
- Non-store retailers, where e-commerce dominates, had a great holiday season. Sales rose 1.2 percent in December on top of November's 4.2 percent surge. These gains no doubt came at the expense of brick-and-mortar boxes as general merchandise inched only slightly higher.
- Furniture stores sales were strong in December and November. Restaurants are also positive. Vehicle sales rose 0.2 percent in December with gasoline sales unchanged.
- Continued gains in wages, along with the strength in consumer confidence and in the labor market, are positives going into the 2018 economy. Real consumption growth is expected to accelerate to about 3.5% in the fourth quarter of 2017, up from 2.2% in the third quarter.
- An improving labor market, strong consumer confidence and an upcoming boost to disposable incomes from the recently-enacted tax cuts suggest that spending will continue to grow at a healthy pace over the first half of this year.
Industrial production showing good strength
- Industrial production rose 0.9% in December for the fourth straight monthly increase. The gain was above expectations of a 0.6% increase.
- For the fourth quarter, production jumped after declining in the prior quarter caused by hurricane damage. For the calendar year, production rose 3.6%, up from a 0.8% gain in 2016. This is the fastest pace since 2010.
- Output among manufacturers only rose 0.1%. Most of the gain in production in December came from mining and utilities. Production among auto makers rose 2%.
Capacity utilization, meanwhile, rose to 77.9% in December, the highest rate in nearly two years. However, it is still well below pre-recession levels, above 80%, that could fan production costs and prices.
- Overall, manufacturing rebounded in 2017, led by autos and oil. It remains to be seen if the sector can accelerate further. The weaker dollar should help exporters.
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