NEW$ & VIEW$ (19 FEB. 2015): U.S. Deflation?

U.S. January Industrial Production Up 0.2% U.S. industrial production increased slightly in January but not enough to offset December’s decline, indicating the sector is off to a slow start in 2015.

Industrial production, which measures the output of U.S. manufacturers, utilities and mines, increased a seasonally adjusted 0.2% from the prior month, the Federal Reserve said Wednesday. That followed a decline of 0.3% in December.

Overall industrial output in January was up 4.8% from a year earlier.

Capacity utilization, a measure of slack in the industrial sector, held steady at 79.4% in January. At the January level, capacity utilization was slightly below its average from 1972 to 2014.

Manufacturing output, which accounts for about three-quarters of overall industrial production, climbed 0.2% in January. The sector was buoyed by gains for primary metals, computers and electronics. One of the few categories that declined was auto production, which fell 0.6% in January, following a 1.3% decline in December.

December’s manufacturing figure was unchanged from the prior month. That was a downward revision from a previously reported 0.3% increase.

Oil and gas drilling fell by 10% last month, the fourth straight drop, the Fed said. (Chart from Haver Analytics)

AIA: Architecture Billings Index “softens” in January

Following a nine-month stretch of positive billings, the Architecture Billings Index (ABI) showed no increase in design activity in January. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the January ABI score was 49.9, down from a mark of 52.7 in December. This score reflects a very modest decrease in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 58.7, down from the reading of 59.1 the previous month.

“This easing in demand for design services is a bit of a surprise given the overall strength of the market over the past nine months,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “Likely some of this can be attributed to severe weather conditions in January. We will have a better sense if there is a reason for more serious concern over the next couple of months.”

Cheaper Oil Drags Down Business Inflation, but Long Deflationary Period Unlikely 

A Labor Department report Wednesday showed broad weakness in prices for everything from medical services to food. The producer-price index for final demand, which measures prices that businesses receive for their goods and services, fell a seasonally adjusted 0.8% in January from the prior month. The index was flat from a year earlier, slipping from 1.1% annual growth in December. (…)

Prices for energy goods tumbled 10.3% in January from the prior month, and the gasoline index sank 24% from December, according to Wednesday’s PPI report. Food prices fell a more modest 1.1%, and prices excluding food and energy ticked down 0.1%. A drop in prices for many health-care services may have reflected a cut in Medicaid payments to physicians, according to economists at BNP Paribas.

Few economists see a risk of persistent deflation that would push down wages and prices for a prolonged period.

“It’s absolutely not going to happen,” Pantheon Macroeconomics chief economist Ian Shepherdson said. “You need to have a broad decline in prices, and at the moment we absolutely do not have that by any stretch of the imagination.”

I applaud economists with strong convictions. Perhaps this one could have stretched his imagination a little bit more. Here’s what I found digging into the yesterday’s PPI report:

Core PPI for final demand goods, which was rising at a 1.9% annual rate during the first 9 months of 2014, was unchanged in Q4 and declined 0.2% in January. In the middle of the production pipeline, PPI for core intermediate processed goods declined at a 4.5% annual rate in Q4, accelerating sharply to -16.8% in January, after rising at a 2.0% annual rate during the first 9 months of 2014. The PPI for unprocessed core goods cratered at a 19.3% annual rate in Q4, dropping another 0.7% MoM in January.

Another way of tracking price trends building up in the manufacturing pipeline is to watch the PPI by stages of production flow. The BLS tracks prices during production stages from 1 to 4. The last 3 months clearly show the deflation trends building up at the manufacturing level with January being the first month on negative prices for the final stage of production.

It is really interesting seeing everybody trying to deflate the deflation risk these days…

U.S. Housing Starts Slip 2%; Permits Down, Too

U.S. housing starts fell 2% in January from a month earlier to a seasonally adjusted annual rate of 1.065 million, the Commerce Department said Wednesday. That reflected a big drop in ground breakings on single-family units, which exclude apartments and reflect the bulk of the market.

New applications for building permits, a bellwether for construction in coming months, slipped 0.7%.

This chart from CalculatedRisk illustrates the flattening trend in multi units while single-family seem to be in an uptrend lately.

Last Year Saw Pivot In New-Home Sizes The median size of newly built homes in the U.S. declined for the third straight quarter, hinting at the return of the entry-level buyer.

Several builders have reported seeing more activity by entry-level buyers emboldened by recent job and wage gains, low interest rates and regulators’ pledges to ease credit standards.

French Consumer Prices Drop Sharply

France’s consumer-price index dropped 1% in January from December and was 0.4% lower on the year, statistics agency Insee said. Analysts polled by The Wall Street Journal had forecast a 0.9% decline on the month and 0.3% on the year.

France’s HICP—a harmonized measure of annual price changes used by the European Central Bank—dropped 0.4% on the year in January after a 0.1% rise in December. That marked the first decline in France’s HICP since 2009, when France was recovering from a deep recession.

Economy’s Supply Side Sputters WSJ columnist Greg Ip finds that supply-side troubles have replaced demand problems as the biggest threat to the U.S. economy.

(…) The evidence is mounting that those two key drivers of the economy’s supply side, the labor force and productivity, are seriously impaired. This isn’t holding the economy back at present, but before long it will. An economy with a sickly supply side will struggle to generate higher standards of living. (…)

Participation has stabilized over the past year but hasn’t risen. Only 0.5 percentage point of the drop in participation can be explained by people who want a job but aren’t part of the labor force. The Congressional Budget Office attributes more than half the drop to demographics. (…)

A stronger economy will draw some workers back into the labor force, but the CBO reckons that any increase in entrants will be overwhelmed by retirements, pushing the participation rate down to 62% by 2019. It estimates the labor force will grow just 0.5% a year in coming decades, compared with 1.5% from 1950 to 2014. (…)

In December, 3.6% of jobs went unfilled, the highest vacancy rate since 2001. That’s higher than in 2007, when there were far fewer unemployed, which suggests available workers aren’t well matched to available jobs, another drag on the economy’s supply side. (…)

Productivity has grown just 1.3% a year since the end of the last expansion in 2007, the weakest performance since the 1970s. Productivity didn’t grow at all last year. (…)

 Greece requests euro zone loan extension, offers big concessions

 Germany stuns markets in rejecting Greek offer for bail-out extension

Japanese Exports Jump in January Japan’s exports continued to rebound in January while imports shrank, as the yen’s sharp fall and the nation’s powerful manufacturing industry helped the country deal with a weak domestic economy.

Exports for the month grew 17% from a year ago, data released by the Ministry of Finance showed Thursday. Imports decreased 9%, marking their biggest fall in more than five years, as the price tag for inbound shipments of crude oil was dramatically smaller.

Exports of semiconductor parts to Asia surged 27% and auto exports to U.S., where demand for pick-up trucks is growing on the back of falling gasoline prices, jumped 14%. (…)

The magic wand:

The Bank of Japan’s export-price indicator shows most Japanese exporters are still refraining from aggressive price cuts, opting instead to pocket fatter profits created by the cheaper currency. (…)

Hmmm…Japanese propaganda aimed at the superficials…Link the above chart with the one below. Japan export prices to the U.S. have declined nearly 6% so far. More to come…

Russia Edges Toward Recession Although the rate of inflation is slowing, a sharp decline in retail sales and a drop in real wages indicated that Russian consumers are bearing the brunt of the economic pressure.

The Wednesday data from the Federal Statistics Service RosStat showed a decline in domestic demand, which had been one of the main drivers of the economy for years, but has been hit by a drop in consumer confidence.

The consumer-price index added another 0.4% in the week to Feb. 16, making an annualized inflation rate of 15.9%. However the weekly price rise was the lowest since mid-December, when a sharp ruble devaluation led to record high weekly inflation figures. (…)

Retail sales fell in January for the first time since 2009, while the decline in real wages was the steepest on record. Sales contracted by 4.4% year on year in January, and real wages fell by 8% from January 2014.

The retrenchment in retail sales may in part be driven by a panic shopping spree in December, when millions of Russians hit the stores in an attempt to spend their sharply depreciating rubles on durable goods.

The sale of nonfood items rose by 10.5% in December, while food sales showed a 0.4% decline. January was the first month in five years to show a drop in both food and nonfood items: 5.5% and 3.5% respectively.

Meanwhile fixed capital investments extended their decline to 6.3% year-over-year in January.