RBC ECONOMICS RESEARCH - DAILY ECONOMIC UPDATE – January 15, 2010
U.S. December CPI rose less than expected although the annual rate jumped to 2.7%. Consumer prices in December rose only 0.1% in the month. This was down from increases of 0.4% and 0.3% in November and October, respectively, and compared to an expected 0.2% gain going into the report. Core prices were also up modestly and in line with expectations rising 0.1% month-over-month. Despite the modest increase in the overall CPI, the year-over-year rate jumped to 2.7% from 1.8% in November. This largely reflected the sizeable declines in gasoline prices of December 2008 (19.3%) not being repeated for December of 2009 because prices inched 0.2% higher. The annual increase in core prices was a much more moderate 1.8% although this was up from 1.7% in November.
In part, the larger monthly increases in the CPI during prior months of 2009 reflected rising gasoline prices, which were up 6.4% and 1.6% in November and October, respectively. In December, however, this component was up a modest 0.2%. Food prices were up a similarly moderate 0.2% although this compared to gains of 0.1% over the previous two months.
The moderate 0.1% rise in core prices was helped by new car prices falling 0.3%, after gains of 0.6% and 1.6% in the previous two months that reflected the introduction of the 2010 car lines during these months. This helped to provide an offset to a 2.4% jump in air fares and a 0.4% gain in apparel prices. Air fares have shown large gains over the last three months although the increase in apparel prices follows declines of 0.3% and 0.4% in November and October, respectively. The modest overall gain in prices suggests that retailers remained cautious about pushing through price increases throughout the Christmas shopping period.
Today’s CPI report indicated that, despite the modest monthly increase in December, the annual rate jumped almost a percentage point to 2.7% from 1.8% in November and well above the Fed’s implicit target of 2%. Most of the pressure, however, reflects the effect of large gasoline-price declines at the end of last year not being repeated this year. The less-volatile core measure shows an annual price increase at a more modest 1.8%. The still high unemployment rate and implicit unused capacity in the economy are expected to keep core prices low and moderating throughout 2010. This will allow the Fed to concentrate on assuring that the recent return to positive growth in the third quarter of last year is sustained. Our forecast does not have Fed funds rising from its current range of 0% to 0.25% until the fourth quarter of 2010.
Paul Ferley, Assistant Chief Economist, RBC Economics
2009: Worst U.S. industrial production decline since 1946 although pace moderated over the course of the yearIndustrial production logged a 0.6% increase in December, bang on market expectations. There were offsetting revisions to the November and October levels. The capacity utilization rate rose to 72.0% from November's 71.5%, higher than the 71.8% expected by markets.
December's rise in industrial production was concentrated in the mining and utilities industries. Utilities output shot up by 5.9% in December after falling by 2.4% while mining output increased by a mild 0.2%. Manufacturing production dipped by 0.1%, only serving to dent November's solid 0.9% rise. Motor vehicles and parts production slid 0.1% following November's 1.5% rise and October's 2.4% decline. The rise in the capacity utilization rate was relatively broad based with the largest gain coming from the utilities component. After falling to a record low in June 2009, capacity usage increased by 3.7 percentage points in the second half of the year although it remained well below the 20-year average of 80.2% indicating that significant excess capacity exists in the economy.
Today's IP report wrapped up the data for 2009, which showed that on average industrial production was running 9.7% lower than in 2008. On a fourth-quarter over fourth-quarter basis, which is thought to capture more fully activity over the course of the year, the drop was a more modest 4.6%, the slowest pace of decline since the third quarter of 2008.
More importantly production increased in each of the past six months. This advance was mirrored in the third-quarter real GDP report, which showed a 2.2% annualized increase. Our monitoring of the monthly data indicates that the economy grew at a faster pace in the final three months of 2009 with real GDP growth tracking a 4.5% annualized gain. Some of this rise is attributable to a sharp slowing in the pace of inventory liquidation; however, our tracking indicates consumer and construction activity also posted gains in the quarter. While the pick up in the fourth quarter is good news and signals that the U.S. economy moved firmly out of recession, these gains will only dent the large output gap that was created during the recession meaning that the significant level of spare capacity will persist in 2010. The 10% unemployment rate and historically low capacity utilization rate attest to that. Given the amount of slack in the economy, we see little scope for the Fed to start raising rates in the near term with the focus remaining on unwinding its less-traditional programs.
Dawn Desjardins, Assistant Chief Economist, RBC Economics
Thanks
Paul Ink
U.S. December CPI rose less than expected although the annual rate jumped to 2.7%. Consumer prices in December rose only 0.1% in the month. This was down from increases of 0.4% and 0.3% in November and October, respectively, and compared to an expected 0.2% gain going into the report. Core prices were also up modestly and in line with expectations rising 0.1% month-over-month. Despite the modest increase in the overall CPI, the year-over-year rate jumped to 2.7% from 1.8% in November. This largely reflected the sizeable declines in gasoline prices of December 2008 (19.3%) not being repeated for December of 2009 because prices inched 0.2% higher. The annual increase in core prices was a much more moderate 1.8% although this was up from 1.7% in November.
In part, the larger monthly increases in the CPI during prior months of 2009 reflected rising gasoline prices, which were up 6.4% and 1.6% in November and October, respectively. In December, however, this component was up a modest 0.2%. Food prices were up a similarly moderate 0.2% although this compared to gains of 0.1% over the previous two months.
The moderate 0.1% rise in core prices was helped by new car prices falling 0.3%, after gains of 0.6% and 1.6% in the previous two months that reflected the introduction of the 2010 car lines during these months. This helped to provide an offset to a 2.4% jump in air fares and a 0.4% gain in apparel prices. Air fares have shown large gains over the last three months although the increase in apparel prices follows declines of 0.3% and 0.4% in November and October, respectively. The modest overall gain in prices suggests that retailers remained cautious about pushing through price increases throughout the Christmas shopping period.
Today’s CPI report indicated that, despite the modest monthly increase in December, the annual rate jumped almost a percentage point to 2.7% from 1.8% in November and well above the Fed’s implicit target of 2%. Most of the pressure, however, reflects the effect of large gasoline-price declines at the end of last year not being repeated this year. The less-volatile core measure shows an annual price increase at a more modest 1.8%. The still high unemployment rate and implicit unused capacity in the economy are expected to keep core prices low and moderating throughout 2010. This will allow the Fed to concentrate on assuring that the recent return to positive growth in the third quarter of last year is sustained. Our forecast does not have Fed funds rising from its current range of 0% to 0.25% until the fourth quarter of 2010.
Paul Ferley, Assistant Chief Economist, RBC Economics
2009: Worst U.S. industrial production decline since 1946 although pace moderated over the course of the yearIndustrial production logged a 0.6% increase in December, bang on market expectations. There were offsetting revisions to the November and October levels. The capacity utilization rate rose to 72.0% from November's 71.5%, higher than the 71.8% expected by markets.
December's rise in industrial production was concentrated in the mining and utilities industries. Utilities output shot up by 5.9% in December after falling by 2.4% while mining output increased by a mild 0.2%. Manufacturing production dipped by 0.1%, only serving to dent November's solid 0.9% rise. Motor vehicles and parts production slid 0.1% following November's 1.5% rise and October's 2.4% decline. The rise in the capacity utilization rate was relatively broad based with the largest gain coming from the utilities component. After falling to a record low in June 2009, capacity usage increased by 3.7 percentage points in the second half of the year although it remained well below the 20-year average of 80.2% indicating that significant excess capacity exists in the economy.
Today's IP report wrapped up the data for 2009, which showed that on average industrial production was running 9.7% lower than in 2008. On a fourth-quarter over fourth-quarter basis, which is thought to capture more fully activity over the course of the year, the drop was a more modest 4.6%, the slowest pace of decline since the third quarter of 2008.
More importantly production increased in each of the past six months. This advance was mirrored in the third-quarter real GDP report, which showed a 2.2% annualized increase. Our monitoring of the monthly data indicates that the economy grew at a faster pace in the final three months of 2009 with real GDP growth tracking a 4.5% annualized gain. Some of this rise is attributable to a sharp slowing in the pace of inventory liquidation; however, our tracking indicates consumer and construction activity also posted gains in the quarter. While the pick up in the fourth quarter is good news and signals that the U.S. economy moved firmly out of recession, these gains will only dent the large output gap that was created during the recession meaning that the significant level of spare capacity will persist in 2010. The 10% unemployment rate and historically low capacity utilization rate attest to that. Given the amount of slack in the economy, we see little scope for the Fed to start raising rates in the near term with the focus remaining on unwinding its less-traditional programs.
Dawn Desjardins, Assistant Chief Economist, RBC Economics
Thanks
Paul Ink
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