Friday, March 15, 2013

Expansion continues: real retail sales, industrial production up in February

- by New Deal democrat

In recent years, consumer price inflation has been almost all about gasoline prices. Back out energy price changes, and overall CPI is almost identical to "core" CPI. Core CPI has been running at about +0.1% or +0.2% a month for years now. Almost all of the difference is based on the change in what drivers pay for gasoline at the pump. You can see this in the below graph. Note that core inflation (green) and all inflation except for energy (blue) are almost always close to identical. It is only when energy is added, giving us total inflation (red) that the numbers change significantly:

(Update: just so the point is clear, "core" inflation is overall inflation minus food and energy. The above is to demonstrate that it is energy, not food, that is the driver of the difference).
That was certainly true of this morning's CPI release for February, showing that "core" inflation was up +0.2%, while overall inflation was up +0.7%. The BLS acknowledged as much, saying that"gasoline ... account[ed] for almost three-fourths of the seasonally adjusted all items increase." Since February one year ago saw an increase of only +0.3% in consumer prices, the YoY inflation rate increased to +2.0%. As you probably already know from your trips to the gas pump, this month so far gasoline prices have actually declined, so last year's March +0.3% increase in CPI may be wiped out, causing YoY inflation to retreat again.

The price of gas is what I have been calling the "Oil choke collar," and I believe it is a prime reason behind the good data we seem to get every winter and early spring vs. the poor data we get in the summer.

That pattern has repeated itself this winter. As Bonddad pointed out yesterday, nominal retail sales grew at +1.1% in February, blowing away estimates. Retail sales ex-gas were also up substantially. Now that we have the February inflation report, we know that real retail sales increased by +0.4% in February, the fourth increase in a row. Real retail sales are up about 4% since July of last year, the month that ECRI has been declaring was the peak for this business cycle, as shown on this graph:

It has to be said that once again, Gallup's daily report of consumer spending has been the most accurate real-time barometer of consumer spending. While other measures were tepid or faltering, this report showed that consumers were powering right through the "fiscal cliff" and the payroll tax increases, at least so far.

If you are looking for a negative, then although it received little attention, the Manufacturing and Trade Sales report for January was also released this past week, and it showed a month-over-month decline from December of -0.3%, even before inflation is factored in. While CPI is not the inflation adjustment for this series, if we make use of it as a back-of-the-envelope estime, that means that "real broad sales" declined about 1% from December into January.

Which brings us to Industrial Production, which also increased +0.7% in February, with January being revised up from -0.1 to 0.0. Industrial production has now risen for 3 of the last 4 months, and in all of the last 4 months has been above its reading from July of last year, once again demolishing the claim by ECRI that July was the peak of this business cycle, as shown on the below graph in which the pre-recession peak of industrial production is set to 100:

This new peak is not just a post-Sandy bounce and cannot be a pre-fiscal cliff anomaly, coming as it does 2 months later. (Update: We have industrial production data going all the way back to 1919. Industrial production has never risen more than two months into a recession, by a maximum of +0.3, in 1990. The idea that industrial production could still be rising 7 months into a recession and be higher by +1.6% is, um, novel to say the least.)

With nonfarm payrolls, aggregate working hours, real retail sales, and industrial production all setting new highs, it is pretty clear that the economic expansion continued through last month. With gas prices somnolent so far this month, there's a good bet that this month will show growth as well.