Fellow Shortrunners,

    On Friday, a Bureau of Labor Statistics report on producer prices, those paid by business to acquire intermediate and raw goods, caused a stir.  When it was announced that the overall producer price index (PPI) fell by 0.4% in November, it again set off a chain of worried commentaries on the possibility of sustained deflation in the US.   I feel these fears are exaggerated.  Looking in more depth at the PPI report, there are signs that deflation is not as likely as some would have you believe. 

     First, the two major factors that pushed the November release into the red were falling oil prices and price cutting on automobiles.  Oil prices have a history of volatility, especially when the perceived threat of conflict with the Middle East tends to rise and fall.  The core PPI, which excludes some food and price indexes for their volatility, declined a more mild 0.3%.  Second, the falling automobile prices is to be expected.  Automobile manufacturers, who originally experienced a boom from all of the interest rate cuts and the ability to offer zero percent financing, are coming down from their lofty heights.  In such an industry experiencing slowing sales, it is typical to see falling prices.  Finally, November's fall of 0.4% follows a significantly large increase of 1.1% in October.  Sure producer prices fell in November, but on the whole they're larger than they were in September.

     The Fed seems to agree with this view.  Last Tuesday, they held interest rates steady at 1.25% after aggressively cutting rates 0.5% in November.  Their statement suggested a bias, or tilt, of balance.  This ambiguous picture tells us that the Fed is equally concerned about the state of affairs of growth in the US economy as they are of the prospects of inflation (or deflation for that matter).  Greenspan and his colleagues at the Board of Governors have dismissed the possibility in recent speeches as well, a clear indication that the monetary authority is unlikely to take action to prevent deflation any time soon.

Newsletter News:  I've received a number of suggestions to implement trend charts for many of the numbers in the data section.  I agree that this would be a beneficial addition.  I'm currently experimenting with several ways of doing this and hope to be able to implement graphics that would make the data analysis section of these emails easier to follow within the next few weeks.

Economic Releases

The data section provides charts and data for the most important economic indicators. 

Wholesale Inventories: -0.3%
Release Date: 12/10

• Wholesale inventories fell 0.3% in November, positive news for the manufacturing sector which could do with some drawdown in the stock of its customers.  Consensus estimates going into the week were suggesting that inventories would rise 0.1%.  Wholesale sales fell 0.1% during the same period, bringing the inventory to sales ratio to 1.22.

International Trade: $127 Billion
Release Date: 12/12

• The current account balance was relatively unchanged from the second to the third quarter.  Analysts had been expecting the deficit to continue to widen.  Nonetheless, at its current rate, the current account deficit is at historically high levels when compared to say overall GDP and many economists believe it to be unsustainable.

Import and Export Prices: -1.0% and 0.1%
Release Date: 12/12

• Terms of trade moved in US favor during November, as falling oil prices drove overall import prices down.  Over the past 12 months, import prices are up 2.4% and export prices are up 1%.

Retail Sales: 0.4%
Release Date: 12/12

• US retail sales rose 0.4% in November, the commerce department said Thursday.  In spite of the positive figure, most businesses are currently predicting that holiday sales are likely to come in at the low-end of their forecasts.

Jobless Claims: 441,000
Release Date: 12/12

• This week's jobless claims release was quite the mixed bag of tricks.  Initial jobless claims jumped by over 80,000 to 441,000.  This is a strong reversal in what had been a relatively positive string of falling jobless claims numbers.  At the same time, economists suggest that the data may be overstated because some of the statistical methods used for seasonal adjustment are far from perfect. 

Producer Price Index: -0.4%
Release Date: 12/13

• November's Producer Price Index fell 0.4%, sparking renewed deflationary fears.  Core producer prices fell a smaller 0.3%.  The 0.4% decrease follows an unexpectedly large rise of 11% in October.

ECRI Weekly Leading Index: 118.7
Release Date: 12/13

• The ECRI WLI fell to 118.7 from 120.8 last week under pressure from weak financial figures.  At the same time, the index's long-term growth rates

Site News

     Expect to see some more graphical features in the html version of this email in the near future.

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Issue #131

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