June Consumer Prices, Industrial Production, July NAHB Survey, Bernanke Testimony

 Energy Flattens Consumer Prices, Manufacturing Output Solid, Builders Good, Bernanke Dour

  • The June Consumer Price Index was unchanged as energy prices eased for the third straight month.
  • The June core CPI increased by 0.2 percent for the fourth consecutive month.
  • Industrial Production increased by 0.4 percent in June, with solid gains in auto and machinery output.
  • The July National Association of Homebuilders Survey showed improving conditions in housing markets.
  • Federal Reserve Chairman Ben Bernanke was somewhat dour in his regularly scheduled testimony.

Today’s mixed bag of economic indicators and testimony will not completely dispel the prevailing gloom about expected economic activity for the remainder of the year, but it does offer some interesting insights. In a nutshell, prices are flat, output is ok, builders are feeling better, substantial macroeconomic risks remain and the Federal Reserve is keeping the door wide open for additional quantitative easing this year. The overall consumer price index was unchanged in June, held down by energy prices which fell for the third consecutive month. The energy component of the CPI fell by 1.4 percent in June as gasoline prices fell 2.3 percent after seasonal adjustment. Food prices gained 0.2 percent. It is too early to say that poor agricultural conditions in the Midwest pushed up June food prices, but that effect is likely to be seen in coming months. Excluding food and energy, the core CPI increased by 0.2 percent for the fourth consecutive month. Apparel prices gained 0.5 percent, while medical care services prices gained 0.7 percent in June. Industrial production for June increased by 0.4 percent. Manufacturing output for June was up by 0.7 percent, with solid gains in machinery (up 2.3 percent) and motor vehicles (up 1.9 percent). Output for defense and space equipment fell by 2.7 in May and by another 0.6 percent in June, held down by the now resolved Lockheed Martin strike. Utility output fell by 1.9 percent in June despite the hot weather in the eastern U.S.. Overall capacity utilization is up to 78.9, still somewhat weak after a 3-year recovery. The NHAB housing market index for July increased to 35, a new 5-year high for the index.  The good news here is that despite the macroeconomic gloom, housing markets are firming and the housing industry as a whole is starting to provide a tailwind for the economy, still small, but every bit is helping.

In his regularly scheduled testimony to the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke gave a somewhat dour assessment of U.S. economic conditions. While predictably balking at promising specific policy interventions, the Chairman left the door wide open for additional monetary policy actions, specifically QE3, for later this year. Given current flat prices and the expectation of future only-moderate price gains, the Fed is firmly focused on weak growth.  The trigger for QE3 will be the unemployment rate, specifically, the failure to achieve sustained improvement in the unemployment rate. With the unemployment rate flat at 8.2 percent in June after increasing in May, the next two months are critical. In the Q&A portion of his testimony, Chairman Bernanke had a remarkable exchange with New York Senator Chuck Schumer. The Senator told the Chairman that there was little prospect that Congress would act on the Fiscal Cliff this year and therefore the Fed should provide monetary stimulus. Chairman Bernanke agreed that the failure of Congress to act would increase the likelihood that the Fed would need to ease policy. In the policy tennis match between the Fed and Congress, the ball may be back in the Fed’s court.

Market Reaction: Equity markets fell at the start of Bernanke’s testimony, but then lifted. Treasury yields are up at the long end of the yield curve. NYMEX crude oil is down to $88.30/barrel. The dollar is up against the yen and the euro.

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