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May 11, 2007
Reports I'm Having A Hard Time Getting Excited About
U.S. retail sales are slowing and inflation is under control, two government reports showed today, further reducing any prospect that the Federal Reserve will raise interest rates.
Retail sales unexpectedly dropped 0.2 percent in April after a revised 1 percent gain the prior month, the Commerce Department said today in Washington. At the same time, figures from the Labor Department showed producer prices excluding food and fuel costs were unchanged for a second month.
The sales report adds to concern that a pullback in consumer spending, which accounts for more than two-thirds of the economy, will jeopardize the expansion. Signs of a further slowdown contrast with the Fed's insistence that inflation is the biggest risk and that the economy will likely grow at a "moderate'' pace.
OK, let's try a test. Which one of these months looks unlike the others?
If you picked April 2007 you've a keener eye than I. It's true that the trend in sales growth has not been favorable over the past year...
... but we could have said the same thing had sales growth registered something closer to the 0.4 percent gain expected by forecasters. What's more, if it's trends we are after the year-over-year growth rate of sales excluding motor vehicles and parts has more or less stabilized over the course of the year (after contracting sharply through 2006):
As for the inflation outlook, the emphasis has been on the "core" PPI and not the headline number:
The last time so-called core producer prices went two months without an increase was at the end of 2005. Including food and fuel, prices paid to factories, farmers and other producers rose 0.7 percent after a 1.0 percent gain in March, the Labor Department said.
It may be true that those tame PPI numbers will ultimately translate to lower consumer prices...
... but arguably the PPI report is telling us more about headline CPI, at least in the near term:
The Bloomberg article included this assessment of the situation:
"The economy is really the issue right now, not inflation,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania...
Unless you held that opinion yesterday, I'm not sure why these reports would lead you to that conclusion today.
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