Choppy Data and Risk Factors Increase Odds of More Fed Action
- The Leading Economic Index for April declined by 0.1 percent in April, the first dip since last September.
- Housing Starts increased in April by 2.6 percent to a 717,000 unit annual rate.
- Industrial Production increased by 1.1 percent in April as utility output rebounded.
- The April Consumer Price Index was unchanged. Gasoline prices fell 2.6 percent seasonally adjusted.
- The Producer Price Index for Finished Goods fell by 0.2 percent in April as energy prices eased.
- Initial Claims for Unemployment Insurance were unchanged for the week ending May 12, at 370,000.
Recent choppy economic data, in the presence of easing prices and increasing downside economic risk factors, may motivate the Federal Reserve to initiate more monetary policy measures after “Operation Twist” concludes this June. The Conference Board’s Leading Economic Index for the U.S. declined by 0.1 percent in April, marking the first drop in seven months. The decline in the leading index comes with some caveats. The largest negative factors were building permits and unemployment insurance claims. The housing permits numbers for April did decline by 2.6 percent, but the March permits number was revised up, and the housing starts data for this year was also revised up. So residential construction for April looks better despite the one-month dip in permits. Also, the initial claims numbers for April were obviously skewed by the Easter holiday and so that effect must be discounted. Claims in early May have improved to a level consistent with ongoing job gains. Even with the caveats, a decline in the leading indicators raises at least a caution flag for economic expectations in the coming months. Industrial production for April, which is part of the Coincident Economic Index, increased by 1.1 percent in April after declining by 0.6 percent in March. Utility output rebounded by 4.5 percent in April after stalling out in December and January due to mild winter weather. Manufacturing output in April gained 0.6 percent. Motor vehicle assemblies were up 6.0 percent for the month. Price data in April showed the drag of falling oil prices. The consumer price index was unchanged for the month as gasoline prices fell by 2.6 percent after seasonal adjustment. Upstream producer prices were also cool as the producer price index for finished goods fell by 0.2 percent.
Downside risk factors for the U.S. economy have increased in recent weeks. The re-emergence of political drama in Greece, and confirmations of a broad recession across the southern tier of Europe, are adding to financial market jitters. Asia still shows growth, but cooling growth. Within the U.S., the fiscal cliff still looms for early 2013. Finally a new risk factor is emerging in our largest state economy, California. Recent California state tax revenue shortfalls, now totaling some $16 billion, will require additional fiscal tightening at the state level. This will compound the local effect from expected federal fiscal tightening. The California economy represents about 13 percent of U.S. GDP. A significant headwind there would be a drag on the entire country. Increasing downside economic risk factors, in the presence of cooling inflation, raise the likelihood of additional monetary policy measures by the Federal Reserve once Operation Twist is concluded this June. The subjective probability of new monetary stimulus announced by the Fed on June 20 has increased to about 60 percent.
Market Reaction: Equity markets are sliding. Treasury yields are down at the long end. Oil is down to $93.02/barrel. Gold has rallied to $1572 per ounce. The dollar is down against the yen and unchanged versus a weak euro.