Economic Highlights for the week ended January 18, 2008 Economic Week In Review: Fed Makes Plans Amid Ominous Outlook Vanguard 1/18 – In a heavy week for economic and market news, rising energy prices and a slumping housing market continue to plague the economy. Federal Reserve Chairman Ben S. Bernanke said a temporary fiscal-stimulus program could help the U.S. avoid recession and suggested further rate cuts by the Fed will be necessary. Concerns of a recession were also felt on Wall Street. For the week, the S&P 500 Index plummeted 5.4% to 1,325 (for a year-to-date total return of –9.7%), and the yield of the 10-year U.S. Treasury note dropped 16 basis points to 3.66%. Producer Price Index (PPI) Falls SlightlyVanguard 1/18 – Producer prices dipped 0.1% in December following November's 3.2% surge, according to the Labor Department. The cost of energy goods accounted for the entire decline. Core producer prices—excluding energy and food—climbed 0.2% for the month. Wholesale gasoline prices dropped 4.8% in December after November's 34.8% spurt. Bear Stearns 1/15 - A 1.9% drop in energy prices was partially offset by a 1.3% increase in PPI food prices. For 2007 as a whole, the overall PPI rose 6.3%, with PPI energy prices up 18.4% in the year and PPI food prices are up 7.4% over the last 12 months. We think that food price pressures will be a consistent theme throughout 2008. The core PPI rose 2.0% in 2007 (year-over-year core PPI prices were also up 2.0% in 2006). Retail Sales SputterVanguard 1/18 – The Commerce Department reported retail sales fell a seasonally adjusted 0.4% in December, the first decline since June. November's number was downwardly revised to 1.0% from 1.2%. Sales were up 4.1% from December 2006 and 4.2% for the year. Excluding gasoline and autos, sales dropped 0.2%. Considering November's and December's sales together, growth has been moderate in a fundamentally weak environment. Bear Stearns 1/15 – In addition, October retail sales were downwardly revised to flat (from 0.2%) and November retail sales were downwardly revised to 1.0% (from 1.2%). Sales Climb Faster Than Inventories Vanguard 1/18 – The Commerce Department announced November's business inventories rose 0.4% on strength from the manufacturing and wholesale sectors. Seasonally adjusted business sales increased 1.6% from October and 8.7% from November 2006. The total business inventories/sales (IS) ratio dropped to 1.24 as sales grew faster than inventories. Manufacturing, wholesale, and retail sales were all up. However, slow December sales indicate retailers will hold back on inventory accumulation. Core CPI Inflation Picked Up To 2.4% From 2.3%; Overall CPI Inflation Remains Elevated Vanguard 1/18 – The Consumer Price Index (CPI) climbed 0.3% in December on a seasonally adjusted basis, according to the Labor Department. About one-third of the CPI's seasonally adjusted rise was due to a 0.9% increase in the index for energy. The core goods CPI, which excludes food and energy prices, rose a seasonally adjusted 0.2% from a month ago and 2.4% at a 12-month rate. For 2007, the CPI increased 4.1% as energy prices gained 17.4% and food prices rose 4.9%. Bear Stearns 1/16 – Overall inflation in 2007 ran at its fastest rate since 1990, although core CPI inflation moderated to 2.4% in 2007 from 2.6% in 2006. However, we do not expect non-core pressures to subside in 2008. Meanwhile, farm prices and the PPI point to further upward pressure on CPI food prices in the coming months. While we expect the Fed to cut rates aggressively this quarter, we believe that this will add to inflation pressures in 2009. |