As data for the fourth quarter of 2012 rolls in we are seeing evidence of an economy that can be described as tentative but not stalled. December retail sales gained 0.5 percent as motor vehicle and parts dealers reported a solid 1.6 percent increase, even though unit auto sales fell slightly to a 15.3 million unit rate in December. Furniture sales were also strong, gaining 1.4 percent for the month, the same as sales at health and personal care stores. Electronics sales fell by 0.6 percent. Lower gasoline prices pulled service station sales down by 1.6 percent. On a year-over-year basis December retail sales were up a moderate 4.7 percent. A key question is how do shoppers feel right now, after taxes have been increased and more fiscal drag is likely to come from federal spending cuts. Layered on top of the expected drag from fiscal tightening may be some give back from recently elevated auto sales. Unit auto sales stepped up from a washed out 14.2 million unit rate in October to 15.5 in November, then eased to 15.3 in December. January and February auto sales could be weaker still. Our estimate for growth in first quarter real personal consumption expenditures is a weak but positive 0.9 percent. This assumes that consumers will feel some support from the positive wealth effect of increasing home prices and increasing equity prices. They will feel comfortable utilizing credit, and they may pull down their saving rate to grow spending slightly despite a dip in real disposable income. We used to say never underestimate the ability of the American consumer to continue to shop in the face of adversity. We will soon see if those days are coming back. Inflation was not an issue at the end of 2012. The producer price index for finished goods fell by 0.2 percent in December as the energy price index dropped by 0.3 percent and the food price index fell by 0.9 percent. The core producer price index for finished goods increased by 0.1 percent in December, the same as November. On a year-over-year basis the finished goods PPI was up a tame 1.3 percent in December. The consumer price index for December was unchanged. Lower energy prices were the main factor while used car, apparel and medical services prices also dipped. The core CPI was up just 0.1 percent in December. Business inventories gained 0.3 percent in November, about the same as October. We may end up getting more GDP support from inventory accumulation in the fourth quarter than expected. The Empire State Manufacturing Survey for January showed ongoing deteriorating conditions in the New York region. Recent weakness in this regional survey has not been reflected in the positive U.S. numbers reported by the ISM Manufacturing Survey. Industrial production increased by 0.3 percent in December. Manufacturing output was up a solid 0.8 percent, possibly still making up for Hurricane Sandy shut-downs, while utility output fell 4.8 percent due to mild weather. House construction continues to gain momentum. Residential building permits for December were up slightly, by 0.3 percent, to hit a 903,000 unit pace. Housing starts gained 12.1 percent to 954,000 units annualized. The biggest gains were in the Midwest where starts increased by 24.7 percent for the month. Initial claims for unemployment insurance dropped sharply, by 37,000, for the week ending January 12, to hit 335,000. Initial claims are a volatile series so it would be premature to call this a breakout improvement. If we get confirmation in the weeks ahead of a sustained improvement in initial claims, accompanied by gains in hiring, that would be an important counterbalance to the expected downside drag from the Fiscal Cliff.
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