January Inflation Follows Fed’s Expectation

Consumer prices rose slightly in January, mainly lifted by energy and apparel costs due to the tension with Middle Eastern countries and a cotton supply shortage.

The 0.2 percent is lower than economists’ forecasts, and they believe that current inflation is being contained by the Federal Reserve, which initially targeted a 2-percent inflation gain for the year 2012.

The rising geopolitical conflict between Iran and Western countries has brought pressure at the U.S. gas pump recently, raising the prices of gasoline for the first time in four months. The national average gas price has increased 9.9 percent in the past 12 months, jumping to $3.443 per gallon by the end of January.

While oil costs increased sharply, the 2.9 percent decline in natural gas costs moderated the total energy prices. The new drilling technique is revving up the economy in the key geographic regions and lowering heating costs for families who use natural gas. The Producer Price Index in January showed the biggest slide in home electric power prices since 2004.

Overall food prices went up 0.2 percent in part because of a sharp surge in dairy product, which moved up 9 percent in total over last year.

Excluding volatile gas and food prices, the core Consumer Price Index, rose up 0.2 percent last month, was driven by a big jump in clothing prices that have contributed a 0.9 percent gain. Cotton prices were a key-driving factor, increasing nearly 6 percent, with concerns that the demand is rising while global supply is weak.

“This [inflation rate] is exactly what we expected,” said Samuel Coffin, an UBS economist, adding that slight inflation indicates a positive sign of economic recovery. The 0.2 percent rise in January – roughly equivalent to 2 percent a year – is what the Fed was aiming for.

Clothing prices will not continue to rise, economists asserted, but the soaring gas prices may scare consumers into reducing spending early this year despite the job market has now been gradually picking up steam.

“We will see in the first half of this year that the [economic] growth is slow,” said Ryan Sweet, a senior economist at Moody’s.

But the growing employment will eventually increase demand, he added, and consumers will start to regain their confidence later this year.

Both Coffin and Sweet forecast a moderate increase in food and energy prices in the future, as does Steven A. Wood, the president of Insight Economics, LLC, who stated in his latest CPI advisory report that the index will continue to climb in the next several months with “relatively low monthly core inflation rate.”

Existing Home Sales continue to soar

Existing home sales continued their upward rally in January, a sign affirming that the housing market is on the path to recovery.

Around 4.57 million homes were sold in January, an estimate better than what was expected.

This is a 4.3% increase from the December home sales, which were downwardly revised by the National Association of Realtors (NAR) and now stand at 4.38 million. Record low mortgage rates, rock-bottom home prices, stable job growth and improved consumer confidence are some of the factors leading to the increase.

Some experts like Ilhan Kubilay Geckil, senior economist at the Anderson Economic Group LLC also believe that the increase is demand driven.

According to him, a large number of baby-boomers, who own houses are spending on condos in cheaper markets like Florida, whose housing market was hit the most, and in turn are selling their existing houses enjoying profits due to the price trade-off. They are getting bargain deals as prices are very low and this is affecting the sales substantially.

“Everybody wants a good deal. Its all about expectations,” he said.

However, the positive increase is weighed down by the number of foreclosure sales or sale of distressed properties that are a part of 4.57 million homes sold.

Distressed sales constituted around 35% of the total homes sold in January compared to 32% in December and 37% in January 2011.

 “The component of distressed sales is significant,” said Jimmy Jean, economic strategist at the Desjardins Economic Studies, a branch of the Canadian Desjardins group.

A huge chunk of foreclosed properties is in the market at present, and buyers are able to buy them at throwaway prices.

However he also said that sooner we get rid of this shadow inventory, better it is for the housing market to revive.

“It is positive to see the inventory decline, the market is slowly but surely improving,” Jean added.

Although the increase in home sales is a good sign for the housing market, a full recovery will happen only when the home prices improve. The increase in the home prices is still far fetched.

“It will at least take about 18 to 24 months for the home sales to have an effect the prices,” said Jean.

Only if the economy maintains the current level of home sales, the effect would trickle down to the home prices. Factors like income growth and the stock market also play a crucial role according to him.

Some others feel that the home sales should further increase by another 1 or 2 million a month.

“We must have 5 to 6 million home sales per month for a housing market recovery,” Geckil said.

He expects the growth in the housing would begin only from the fourth quarter of 2012 and there would be no significant movements in the home prices till 2013.

The condition of the housing market is sure improving, however, the fear of even a slight hit to the existing favorable conditions sill looms in the industry.

“We expect to have a much more balance in the market this year, given that there are no unforeseen surprises,” Walt Molony, head of public affairs at the National Association of Realtors (NAR) said.





Initial Jobless Claims at Record Low: Encouraging Sign for Job seekers

Initial jobless claims for the week ending February 11 fell to the lowest numbers in four years, a sign that employees are in greater demand than previous months and that business in the private sector is growing.

Last week, 348,000 people filed for unemployment. The last time these figures fell below 350,000 was September 2008, according to the Department of Labor.  These claims numbers were adjusted to account for seasonal trends in employment.

Jobless claims generally rise in the fourth quarter when employers reevaluate staffing needs and fall in the first quarter. Remarkably, these claims fell in both the fourth and first quarters bucking typical seasonal patterns, said John Herrmann, chief economist at Herrmann Forecasting. “What that means is that the underlying job environment is much healthier than what people had expected,” said Herrmann.

In comparison to the consensus estimate of 365,000, which was based on a Bloomberg survey of dozens of economists, the number of actual recorded claims showed a much sharper decline.  While these reports, are widely considered more erratic than similar measures recorded over longer periods, such as the Bureau of Labor and Statistics’ monthly household survey, the fact that these numbers have been declining for the last three weeks makes the downward trend more believable.

The 4-week moving average, which is seen as a more reliable indicator than the weekly claims figure, also showed a modest decline from 367,000 the week prior (Feb. 4) to 365, 250 claims (Feb. 11).  Like the claims numbers, the moving average is seasonally adjusted.

“This is cutting edge good news,” said Robert Brusca, chief economist at FAO Economics. The fact that numbers are “well-behaved”, showing a steady decline of 13,000 fewer claims than the week prior, (the week ending Feb 4.) instead of a more dramatic drop, actually makes the marker more credible.  “Nobody can quite understand why the jobs market would be improving and so everybody wants to deny it, but the facts relating to the job market from a variety of indicators using a variety of methods are pretty clear about what they’re saying.”

Putting the weekly claims figure of 348,000 in context, “a level around 300,000 is pretty normal for the U.S.,” said David Semmens, US Economist at the London-based Standard Chartered Bank. And while Semmens called the report “promising,” he is wary of being overconfident. “You really want to see the four-week moving average moving below that point [of 350,000] and then staying below that point, because just six weeks ago we were above the 400 mark,” said Semmens.

Since the recession began, 8.8 Million people have lost their jobs and in the private sector only 41 percent of those jobs have been recovered, said Herrmann.

As the labor market grows, we will see a positive shift in those economic indicators—such as consumer confidence—that have made some economists skeptical about a recovery, said Brusco.  “[I]f people have jobs, they have income and if they can spend then they will spend.  And if they spend that will underpin the economy and then we’ll have a reason to have more job growth,” he said.

Government support is critical to this cycle. If we have the continued support from the Federal Reserve and if payroll tax cuts remain in place, the market could average 160 to 175,000 new jobs per month this year and 200,000, next year, said Herrmann.  According to his estimates, this would allow the labor market to recover 80 percent of lost jobs.  “The idea is not just to recover all the jobs lost but then to create an environment that promotes job growth past that point as we go forward,” said Herrmann. By harnessing the momentum of the government’s support even as it’s withdrawn, businesses could recoup the final 20 percent of jobs on their own.

Retail Sales Up, Car Sales Down

Retail sales rose 0.4% in January, well below expectations in a sign that the economy isn’t recovering quite as quickly as economists would like to think.

Since automakers had reported an increase in unit sales earlier in the month, the 1.3% drop in motor vehicle sales was the biggest surprise in this Commerce Department report for most economists. This could have been because of fleet sales—large number of unit sales to government agencies or rental car companies that wouldn’t reflect on retail sales numbers, said Guy LeBas, an economist at Janney Montgomery Scott LLC.

Motor vehicles sales might also have fallen due to competition from foreign manufacturers who were able to price their units more competitively in response to a stronger dollar.

However, once motor vehicles sales numbers were excluded, core retail spending rose at 0.7%, the highest increase since March.

“That’s not particularly surprising,” said Millan Mulraine, an economist with TD Securities, “given that we’ve seen a improvement in confidence, and more importantly we’ve seen a labor market recovery that appears to be gaining steam.”

Consumers spent more money at general merchandise stores, a category that includes chains like Walmart and Target and department stores like Macy’s. They also spent more at restaurants and bars, and to a far lesser degree, on electronics.

Electronics sales slumped by almost 4% in December and recovered only slightly in January. This decrease is a reflection of significantly lower prices than lowered sales volumes, said Mulraine.

“Electronics sales are driven by the release dates of iPhones and tablets,” said Mark Vitner, chief economist at Wells Fargo, making it difficult to seasonally adjust and compare electronics sales numbers.

Sales at online retailers fell by 1.1%, after a very soft December. “The drop-off was probably a little bit larger than what we’ve seen in years past,” said Vitner, adding that it was probably just a post-Cyber Monday slump.

December retail sales figures were revised down from 0.1% to reflect virtually no change from November, which was especially disappointing as November and December are considered the most important months for retail sales.

Overall, retail sales were 21% higher than the recession low, and 6% higher from the pre-recession high.

While January’s slower than anticipated gain in retail sales had most economists pleased with what seems to be a steadily recovering economy, LeBas credited this general feeling of optimism to what he calls ‘eco-phoria,’ or ‘euphoria over the economy.’

“Euphoria, by its very nature, is not warranted,” he said, “the reality is a lot more muted.”

The Upside to the Widening Trade Deficit

The U.S. trade deficit grew in December and overall in 2011 for the second year in a row, a sign the economy is picking up steam, say economists.

From November to December, the trade deficit grew to $48.8 billion from $47.1 billion. Within that gap are signs of economic growth: an increase in U.S. imports of capital goods, and modest growth in exports that aligns with President Obama’s five-year goal to double U.S. exports by 2015. If maintained in 2012, these trends could relieve some of the pressure put on the deficit by climbing oil prices, economic volatility in Europe and the burgeoning trade deficit with China.

The trade deficit closed the year at $588 billion, its highest since 2008, the year before the recession. But economists say this is healthy. “An increase in the trade deficit commonly happens when we are growing well,” says Kevin Harris, chief economist at the market analyst group Informa Global Markets. “Even though our trade deficit is large, we’ve been able to sustain it for a long time.”

Imports grew by 1.3% for the month of December and 13.8% for the year. The largest share in December was in capital goods, which tallied $1 billion more than in November. The jump suggests American companies are investing in supplies to build new products. It also mirrors recent gains in the manufacturing sector, which saw a faster growth, bigger profits and more jobs in 2011 than in recent years.

Although imports outpaced exports in December and for the year, exports rose by 14.5% in 2011. This is less than in 2010 but on target with President Obama’s goal to double exports by 2015. Much of the demand comes from emerging economies, which are buying U.S. products – mostly industrial supplies and materials such as tractors and industrial combustion engines – to feed their manufacturing and agricultural needs.

Should these trends continue in 2012, they could help offset factors that typically swell the deficit, such as rising fuel prices, which increased by 20.8% in 2011. They could also provide a buffer against what will likely be lackluster trade with Europe in the coming months, despite a 1.8% spike in European-bound exports in December.

One factor that continues to plague the trade balance is the deficit with China, which closed at a record $295.7 billion for the year. Economists say the December gap in particular was off, due to the early Chinese New Year in January, which compelled Chinese businesses to move products aggressively before the holiday. “The January report will be more favorable – it will be narrower, and probably steady or flat in February and widen out in March, as we follow the production cycle in China,” says economic forecaster John Herrmann of Herrmann Forecasting, LLC.

All told, the growing trade deficit is a positive sign for a U.S. economy eager to grow at a faster clip in 2012.