An Important Update On the Economy

Now that the government is up and running again, we got some interesting economic reports this week that had been delayed because of the shutdown. So let’s spend some time today reviewing what we’ve missed from the past few weeks.

Government Shutdown Shakes Up Consumers

In September, U.S. retail sales slid 0.1% to $425.9 billion. Even so, this was slightly above the 0.2% drop forecast by economists. And when excluding vehicle and auto parts sales, retail sales were up 0.4% for the month. Core retail sales were weighed down by a 0.5% dip in clothing and accessories sales and a 0.9% decline in department store sales. Meanwhile, electronic sales ticked up 0.7%. Overall, these are lukewarm results and it seems that many economists are placing the blame on nervousness caused by the impending government shutdown. In any event, all eyes are on the upcoming holiday shopping season to get a true sense of the state of U.S. consumerism.

In October, the Conference Board’s consumer confidence index fell to 71.2, below the 75.0 reading forecast by economists. With the September reading revised up to 80.2, this represents the steepest month-to-month drop since August 2011. Breaking it down, the current conditions index slid from 73.5 to 70.7 while the future expectations index plunged from 84.7 to 71.5.

It shouldn’t come as a huge surprise that the 16-day government shutdown took a toll on consumer confidence. My hope is that the holiday season will instill some good cheer in consumers and that we’ll see this index rebound heading into the end of the year.

All Quiet On the Inflation Front

In September, consumer prices edged up 0.2%, higher than the 0.1% gain forecast by economists. Mirroring prices at the wholesale level, consumer energy prices rose 0.8%, making up about half the overall increase. Core CPI, which of course excludes food and energy prices, advanced 0.1%. This matched the consensus forecast. Over the past 12 months, core consumer prices have risen 1.7%, close to a two-year low. The combined results from the PPI and the CPI suggest that inflationary pressures haven’t started brewing in the economy. This is good news for U.S. consumers. And, because we haven’t hit the Fed’s target of 2% annual inflation, this gives the central bank further justification to maintain its monthly bond buying program.

In September, wholesale prices retreated 0.1%. Economists were expecting a 0.2% in the PPI. Wholesale food prices fell 1% on a plunge in vegetable prices. On the other hand, energy prices rose 0.5% on a jump in gasoline prices. Excluding food and energy prices, which tend to fluctuate more wildly, core PPI advanced 0.1%, in line with analyst estimates. In the twelve months leading up to September, wholesale prices have climbed 0.3%; this is the weakest reading in nearly four years.

While inflation remains tame at the wholesale level, we may see a dramatic shift in results come February 2014. That’s when the Labor Department is revising the PPI to now include the prices companies pay for services and construction. As the economy is becoming increasingly driven by services, the hope is that the broader measure will provide a better snapshot of wholesale prices.

Jobless Claims Still Unreliable

Last week, jobless claims fell 10,000 to a seasonally adjusted rate of 340,000. However, they still were higher than the 335,000 in claims forecast by economists. The more stable four-week moving average rose by 8,000 to 348,250. Layoff activity remains elevated as California still sorts through its backlog of applications. And the lingering effects of the government shutdown further distort the data. Consider this: The four-week moving average was 305,000 a month ago, a week before these two issues started. So it’s difficult to get a pulse on the labor market from this front.

Have a nice weekend,

Louis Navellier

Louis Navellier

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