Industrial production (IP) was of little help, even though the report showed activity advanced for a sixth-straight month. All of the gains came from utility production. Without abnormally cold weather IP would have likely halted its streak.
As we’ve been talking about for a while, what’s-bad- is-good has been the traders’ mentality as it indicates ZIRP live on, so maybe it was the well-balanced factory number that shook traders a bit. I’ve got a feeling though the retail banking side of the JP Morgan report is what did it. This situation isn’t good for anyone because it shows deep problems that exist and relays the message that it will take much longer than is normal for a durable recovery to materialize. Debt levels are way too high and impossible to manage around for too many people at the current rate of joblessness.
Just looking at the headline profit number out of JP Morgan it appeared they knocked the cover off the ball, but it was all on higher investment-banking fees – thank you ZIRP, say the banks. If not for the Fed at zero, corporate refinancing and securities trading activity would not be robust enough in the current environment to offset serious retail banking weakness.
And JP did warn on the retail banking side as consumer-credit problems persist. Their card-services division’s fourth-quarter losses were artificially low due to a payment holiday the bank implemented. This only means you’ve delayed things. Chairman and CEO Jamie Dimon told investors that the unit’s losses will continue through 1H 2010, even before setting aside more money to cover losses. He mentioned that proposed credit-card legislation will add to these losses and if the unemployment rate doesn’t reverse course fast, they’ll have to add meaningfully to loan-loss reserves. (Adding provisions to loan losses subtracts from profit.) Dimon also expressed concern about a double-dip – the economy falling back into recession a few quarters out.
Market Activity for January 15, 2010
Consumer Price IndexThe Labor Department reported that CPI for December rose 0.1% (+0.2% was expected). Core CPI, ex food and energy, was up the same and in line with expectations. From a year-over-year perspective, consumer prices as measured by this gauge are up 2.7% -- the second month of increase after eight months of decline as those readings were being compared to very elevated levels due to the commodity-price spike of summer 2008. The core rate was up 1.8% after a 1.7% in November – both of these y/o/y readings were in line with expectations.
The owner equivalent rent component, the largest component of CPI as it makes up 24% of the index, came in unchanged (up just 0.7% over the past year). Recreation, which makes up 6% of CPI, was down 0.4% (also down 0.4% year-over-year). The transportation component, which accounts for 15% of CPI, rose 0.4% (up 14.4% y/o/y) -- pushed higher for the month by a 0.3% increase in vehicle prices and a 0.2% rise in gasoline. Food and beverages also makes up 15% of the gauge, and that component rose 0.2% (down 0.4% y/o/y).Overall, CPI continues to print pretty harmless results and an environment in which credit continues to contract will keep the traditional inflation readings from getting out of control for a while.
Those are the official figures, the what is seen. Let’s focus for a moment on what is not seen, as the 19th century French economist Frédéric Bastiat would put it
While the vast majority of economists focus on the CPI (or even narrower versions such as core inflation readings, which exclude food and energy prices – the Fed’s preferred gauge), it’s not all about official inflation data. One must also be cognizant of cost volatility that arises from the Fed’s willingness to implement exceptionally easy monetary policy for extended periods of time. While the official inflation gauges will eventually reflect mistaken Fed policy, global trade and high rates of productivity via massive payroll reductions may just keep a lid on these conventional inflation measures for some length of time. Certainly too, as mentioned above, credit contraction has put a ceiling on the inflation gauges.
But the costs of goods such as energy, building materials, essential metals and certain foods presents a sort of shadow inflation. Another key point is that wild swings in commodity prices, such as the volatility we’ve witnessed over the last several years, make it very difficult for businesses to manage and hedge around. These are large costs that are not fully captured by the official inflation readings. When commodity prices are left to rise as high as traders care to push them (as the markets respond to careless Fed policy), the deeper the economic damage we face on the back side of it.
The Fed can do something about this risk by gently tightening monetary policy. Even a mild exhibition that shows they are serious about future inflation, specifically the rising prices that may result from a downed currency, would send a message and remove the green light from accumulating commodities and selling the dollar. Of course, the housing market likely cannot withstand mortgage rates that are even 0.75-1.00 percentage points higher. Thus the Fed is choosing to err on the side of future inflation; I think this is a mistake because the downside that still needs to occur in housing is going to eventually occur anyway.
Empire Manufacturing
The New York Federal Reserve Bank’s measure of factory activity within the second Fed district posted a great number for January. Empire manufacturing printed 15.92 for the month after a disappointing 4.50 in December. While the reading has printed higher number over the recent past – hitting 33.4 in October and 22.3 in November – the internals of this latest report were the best we’ve seen yet.
New orders jumped to 20.48 from 2.77 in December; delivery times rose to 6.67 from -2.63; unfilled orders surged to 2.67 from -21.05; the average workweek (hours worked) jumped back to positive territory hitting 5.33 from -5.26 in December.
The only disappointment came by way of the inventory reading that still shows substantial contraction. Thursday’s business inventories reading was a good one, but the rebuilding surely isn’t universal.
The figures we’ve been watching most closely are delivery times, unfilled orders (for evidence that current employees are becoming stretched, which it what it will take to force new hires) and inventories (for a pick up in business confidence). We’ll take two out of three for now.
The report also offers an attachment called the Capital Spending Survey. When manufacturers were asked about their capital spending plans 6-12 months out, 44% indicated they expected to increase spending relative to levels of the past 6-12 months, 44% indicated it would stay the same and 12% indicated a decline. Since the previous 12-month period saw the largest capital spending declines in the postwar era, I’m not sure this is saying much. Seventy-nine percent noted the expected increase reflected investment that had been postponed during the recession. The most commonly cited factor behind increased investment spending was a need to replace IT and other capital equipment – 82% of respondents.
This is in line with our expectation that firms will manage capital spending to maintenance levels and not much more over the next year.
Industrial Production
The Federal Reserve released their industrial production number for December, showing a 0.6% increase – the sixth-straight positive reading. However, the pick up was completely due to colder weather as the utility component accounted for 97% of the rise in the total index.
Manufacturing production slipped 0.1%. This component makes up 79% of the IP index. This is not what the other manufacturing surveys have shown as most pointed higher in December – although most of the regional factory gauges are solely based upon what respondents are saying rather than pure degrees of improvement. Industrial production is about absolute improvement.
The utility component, which accounts for a little more than 10% of the index, surged 5.9% in December. (This was the second-highest utility production increase since records began in 1939 – second only to the 7.0% jump in November 1989 and wildly above the monthly average of 0.4%; it has weather-related increase written all over it.) Mining, the third component of the index, rose 0.2%.
To offer a little clarity here, the manufacturing component was held back by a substantial 2% decline in construction-supply production. Other areas of the business side and the consumer-related markets looked pretty good. The construction area is going to weigh on things for a while.
Capacity utilization (proportion of plants in use) rose, but will remain below average for an extended period unless business and consumer activity surges in the coming months and put idled resources to work. The overall figure rose to 72.0% from 71.5% in November.
Again, it was all from the utility component where the utilization rate jumped to 82.9% from 78.4% -- 87.7% is the long-term average. Manufacturing capacity utilization ticked up just slightly to 68.6% from 68.5% -- the long-term average is 80.8% and the current 68.6% remains the second-lowest level on record outside of the recent lows it is now bouncing off of. Mining rose to 85.7% from 85.5% -- close to the long-term average is 87.3% as commodity prices have been hot, save the last two weeks. Futures
U.S. stock-index futures are down this morning as disappointing earnings results out of China, Europe’s ZEW – a gauge of investor expectations -- fell, and an inflation report out of Britain showed the largest monthly jump on record has traders pulling back just a bit.
Not much by way of data today, all eyes will be on that Senate race in Massachusetts.
Have a great day!
Brent Vondera, Senior Analyst
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