1/15/2015
By Jennifer Coombs

Inflation continued its decline at the producer level in December thanks to lower energy costs. The producer price index (PPI), for total final demand decreased by 0.3% month-over-month in December, after falling by 0.2% in November. However, core PPI, which subtracts food and energy, rose by 0.3% month over month, slightly higher than the consensus estimate of a 0.1% gain. On a year-over-year basis, PPI final demand rose 1.1%, lower than the 1.4% gain experienced in November. Core PPI, year-over-year, rose a whopping 2.1% in December versus a 1.7% increase in November. All in all, inflation continues to exhibit signs of being under pressure which should prevent the Fed from tightening monetary policies in the near-term.

Piggybacking off of the Fed’s Beige Book report, the first indication of January’s manufacturing sector was positive in the New York Fed district. The Empire State Manufacturing Survey noted a contraction to +9.95 in January, compared to December’s upwardly revised reading of -1.23 (from -3.58). New orders also showed commendable strength, coming in at a reading of +6.09 in January, far off of the near 0.0 reading in December. The shipments component was strong as well, coming in at +9.95 in January after a +2.25 in December. One major positive point of the report is a solid gain in the employment sector, which increased to 13.68 from 8.33 in the month before. Outlook confidence in the New York region made a 9-point jump in the month to 48.35.

By contrast, activity in the Philadelphia region showed a slowdown relative to the month before, although this was already highlighted in the Beige Book report yesterday, so the news wasn’t surprising. After a very positive report in December, the Philly Fed’s general conditions index in January fell to a reading of +6.3 after a strong, revising +24.3 reading in December (from +24.5). However, growth in new orders remains strong at +8.5, but still down from December’s +13.6. The six-month outlook for manufacturing also slightly improved for the month at a strong reading of 50.9 in January from 50.4 in December. Weakness was also found in shipments, which are in contraction at -6.9 compared to the +15.1 reading in December. Employment was also weak at -2.0 from December’s +8.4 reading. Overall, price readings were soft with input price inflation moderating further and output prices now in relatively modest contraction. This report, coupled with the Empire State report, is a bit contradictory. Ultimately, mixed data is to be expected across the Fed Districts, but the fact that both readings show gains in the six-month outlook is very encouraging to us.

Lastly and seemingly overlooked, were the weekly jobless claims. Initial claims showed a sharp build in the January 10^th week, up by 19,000 to a 316,000-level which is the highest since September 2014. This moved the 4-week average up by 6,750 to 298,000; which is about even with the average from a month earlier. Continuing claims, which lag by a week (ended January 3^rd) were mixed, falling by 51,000 to 2.424 million, but the 4-week average increased by 12,000 to 2.415 million. This is also even with the reading from a month ago. There doesn’t seem to be any special factors affecting the report, although the jump in initial claims could be related to the first-of-the-year job quits.

Jennifer Coombs
Wall Street Strategies

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