No Inflation, Decent Starts, Magical Claims
- The December Consumer Price Index was again unchanged for the month.
- The core CPI gained just 0.1 percent in December, and is up 2.2 percent over the last year.
- Housing Starts for December were down 4.1 percent, to a 657,000 unit annual rate.
- Building Permits were essentially unchanged at a 679,000 unit annual rate; good news for later.
- Initial Claims for Unemployment Insurance fell by 50,000, to hit 352,000, for the week ending Jan 14.
The string of benign economic data continues with little inflation, signs of life in residential construction, and a magic plunge in jobless claims after a surge the week before. The consumer price index for December was unchanged for the second consecutive month, and it fell slightly in October, so there has not been an increase in the overall CPI since last September. The energy price index fell for the third consecutive month, countering a moderate gain in food prices. Over the last 12 months the headline CPI is up 3.0 percent. The year-over-year comparison will continue to improve as we move past the early 2011 energy price surge. The core CPI (all items less food and energy) was up 0.1 percent for the month and 2.2 percent from one year ago. A tightening rental market for residential real estate will continue to lift the core CPI through 2012. Producer price data for December, discussed in yesterday’s Economic Alert, is following the same pattern of declining year-over-year increases.
Residential construction data through year-end 2011 is encouraging. Total housing starts for December did fall back as expected, declining 4.1 percent to a 657,000 unit annual pace. But that was a relatively small retreat off of November’s surge. Multifamily construction eased. But single-family starts extended their winning streak, now up for three consecutive months. Even better news is that fact that permits for new construction were essentially unchanged in December at a 679,000 unit rate, maintaining the gain from November. Initial claims for unemployment insurance have been erratic in January. Last week’s reported increase of 24,000 claims was countered by this week’s reported decline of 50,000 to a level of 352,000 initial claims for the week ending January 14. This is why moving averages were invented. The four-week moving average for initial claims is down to 379,000, consistent with strengthening monthly job growth.
The string of good U.S. data raises two important questions: (1) How much should we fear drag from the Eurozone? and (2) Does better U.S. data reduce the odds of another round of quantitative easing by the Fed? Concerning the Eurozone, we can say with confidence that we have not yet felt the full effect of their spreading recession, and the linkages between European and U.S. financial markets can transmit stress very quickly, so that risk remains on the table. About the Fed we can say that that Chairman Bernanke has consistently kept the door open for additional QE, and he is very concerned about the U.S. housing market. Better data today does marginally move the QE meter back, but not to zero. A significant reduction in the odds of additional QE would come with another two months of solid job gains.
Market Reaction: Equity markets opened with gains. Treasury yields are rising at the long end of the yield curve. Oil is up to $101.50/barrel. The dollar is up against the yen and down versus the euro.