Consumer Price Index
Consumer prices rose 0.2% in December, while the core rate, which excludes food and energy, increased 0.1%. This keeps the year-over-year gain in the core rate at 2.3%, while overall inflation has now risen from 1.8% to 2.1% to an also 2.3% rate on a year-over-year basis. Yet the Fed has no inflation concerns. 2.3% may not seem like much to you or me, but when your income is growing at the same rate, you have no increase in your purchasing power. The Fed continues to fall back on the less accurate (in my view) Personal Consumption Expenditures price index, which is up just 1.7% over the past year. Why? The PCE has a larger healthcare component than other gauges, and it measures Medicare and Medicaid reimbursement rates, which are artificially low and not market prices. They are set by the government. Therefore, the PCE is the only measure of inflation consistently below the Fed’s target. That’s very convenient for a Fed that wants to continue pumping financial asset prices with stimulus the economy doesn’t need.
Real average weekly earnings for all employees on nonfarm payrolls now show ZERO growth over the past year, which is largely due to the rise in the CPI and decline in average hours worked, as can be seen below. If YOUR inflation rate is higher than 2.3% and you earn hourly wages, then it is very likely you are realizing a decline in purchasing power. That’s not a good sign for consumer spending moving forward.
Producer Price Index
The Producer Price Index (PPI) for final demand rose just 0.1% in December and is up just 1.3% over the past year, while the core rate is up 1.1%. These more modest price increases give the Fed some cover, as they are the weakest increases we have seen since 2016. I expect the PPI to slowly climb to 2% in 2020. The intermediate demand categories as opposed to final are rising at faster rates, and they should pass through.
Retails sales rose 0.3% in December, led by gasoline sales (+2.6%) and clothing (+1.6%). Sales of motor vehicles and parts declined 1.3%. Core sales, which exclude autos, gasoline, building materials, food services and bars, rose 0.4% in December and are up 6% year-over-year, but this figure was revised down for October and November. The consumer continues to drive all the growth in the economy. Let us hope that the lack of real wage does not slow spending.
Here is a new consumption indicator that I learned about last week – pickup truck sales. Most large pickup truck purchases are done by small businesses, and it is a discretionary purchase. Therefore, the change in sales year-over-year is a good indicator of the health of small business, which is the backbone of the economy. December sales showed total sales for 2019 were up 2.3% versus 2018. That’s a good sign for small business. Sales have been stable for the past four years, but if they start to slide, it is probably a precursor to a downturn in the economy.
Wow! Good times for the homebuilders; starts surged 16.9% in December to an annual rate of 1.608 million. Single-family home starts rose 11.2% and multi-family units rose 30%. The number of units under construction rose 2.3% from the third to the fourth quarter, which means that the housing industry will contribute to grow in the fourth quarter. Starts are up 40% over the past year.
Warm weather across the country depressed industrial production in December with a decline of 0.3%. Utility output fell 5.6%, while mining rose 1.3% and manufacturing increased just 0.2%. A 7.6% decline in auto production held back manufacturing. The capacity utilization rate fell to 77%, which is 2.8% below the long-term average. Industrial production rose 0.8% in 2019 over all of 2018.
If the Fed’s massive liquidity injections into the banking system led to real wage growth, the economy would be off to the races. Unfortunately, it does not. It does supercharge financial asset prices, which makes the economy look a lot strong than it is. This is especially true considering that we are borrowing close to 5% of GDP each year in order to realize just 2% growth in GDP. If the US were a private company, it would be on a steady path towards bankruptcy.
The lack of real wage growth in December is important to watch. The Fed has said it is willing to allow the rate of inflation climb above its target of 2%, considering it was below target for such a long period of time. If growth in average hourly wages does not keep pace, we will start to see a decline in real wage gains. This will have an impact on real consumer spending growth, which is what is fueling all of our 2% rate of economic growth.
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Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.