Well, despite all the doom and gloom out there in the media, the economy keeps on ticking. The headlines are screaming about subprime mortgage loan problems, but the macroeconomic data continues to improve.
Last week we got a trade report showing very strong net exports for August and September. These data, along with stronger inventories, point to an upward revision to third quarter GDP growth from 3.9% to about 5%. And the fourth quarter is off to a decent start. Today’s report on retail sales for October shows a rise of 0.2% following a very strong 0.7% gain in September. Retail sales are up 5.1% over the last 12 months; a pretty decent performance, given the housing woes and high energy prices.
Inflation fears continue to look unjustified. Today’s Producer Price Index (PPI) report for October, shows a tiny 0.06% increase in the total PPI and no increase in the core (ex food and energy) PPI for October. I expect some bigger increases in the total inflation rates due to the recent renewed surge in oil prices, but the core inflation rates look under control. Some of you have asked – why look at core inflation, when we all use energy and eat food? My answer is that core inflation gives useful information about the short-term trend in inflation and helps the Federal Reserve in setting interest rates. I would not want OPEC oil price gouging or Midwest droughts to push around short-term U.S. monetary policy. Total inflation is helpful in gauging the short-term impact of higher prices on consumer income and spending and long-term inflation trends. Right now, both measures are fairly close – the total Consumer Price Index (CPI) inflation rate is 2.8%, and the core CPI rate is 2.1%. Again, the recent oil price rise will likely push total CPI inflation up again, but not a lot.
Speaking of oil, our “friends” who run the OPEC oil cartel, colluding with impunity to set oil prices, are meeting again over the weekend in Riyadh, Saudi Arabia. I think they are worried. We are seeing a rise in non-OPEC oil supply, surging alternative energy supplies, and some signs that global demand is flattening and may be falling. The last thing OPEC wants is a major increase in competitive energy sources and a sustained shift to conservation. They may decide that it is time to push prices back down again to head off the competition. On the other hand, it could be just wishful thinking; I certainly am tired of paying sky-high prices for gasoline and other oil-based products. The U.S. equity market is once again showing signs of life. After a fall back to near the mid-August low, the Dow and other broad equity indexes recovered sharply yesterday. The Dow was up 2.5%, the S&P 500 was up 2.9%, and the NASDAQ was up 3.5%. While short-term stock market forecasting is usually silly, I think the recovery is justified by strong economic and company earnings fundamentals and therefore a rebound is more likely than not. As always, please call me with questions or concerns.
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