Two Days, Four Indicators

Take a look ahead at the numbers being released this week, and watch for the bond market's reaction.
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Trey

JACKSON HOLE, Wyo. -- Three things today.

    The retail sales report for April will be released Thursday. Consensus estimates suggest that the market is looking for a 0.3% overall increase and a 0.4% increase excluding autos. If that is really the case -- do economic releases have whisper numbers? -- then the report might surprise most observers. Good forecasters are looking for an overall gain twice that big (some clock in as high as 1%), and a huge price-induced surge in sales at gasoline stations alone virtually guarantees that the ex-autos number will print north of 0.4%. Also keep in mind that, if the recent past is any guide, Census will also say that the March increases reported a month ago have been revised sharply higher (perhaps doubled). Bottom line. Retail sales boomed 14.9% during the first quarter of the year; that marked their strongest performance of the cycle. They are unlikely to produce a showing that strong again during the second quarter, but the retail numbers released Thursday will do nothing to support the contention that consumption is slowing materially. The producer price index for April will be released Thursday, and the consumer price index for April will be released Friday. Look behind the headline numbers. Owing to huge increases in oil and hence gasoline prices, the overall PPI is likely to print as big as 0.9% and the overall CPI is likely to print as big as 0.6%. But it's the core (excluding food and energy), or underlying, price performance that the Feds are looking at; that's the number they want to see improve in order to keep them from thinking seriously about raising rates. The core PPI looks to print at 0.1% (precisely its average monthly increase over the past two years). That would produce a year-on-year increase of 1.7%, which would go down as the second straight such yearly gain. No improvement there, but no deterioration, either. The core CPI looks to print at 0.2% (precisely its average monthly increase over the past two years). That would produce a year-on-year increase of 2%, which would mark an improvement on the 2.1% rate that prevailed a month ago. This is precisely the kind of core price improvement that the Fed wants to see. Risk. At least two shops are pointing out the risk of a 0.3% core CPI print on the thinking that the housing portion of the index (which accounts for 39.8% of the CPI) has recently been lagging real-world housing-market developments. It's important to note that a 0.3% core-index print still wouldn't produce a deterioration in its year-on-year change, but it is worth keeping in mind that the market is not accustomed to core prints bigger than 0.2%. (There have been just three of them during the past 23 months.) A 0.3% print might turn a few heads. Bottom line. It is possible that anyone looking for just-plain-bearish underlying price news will be able to find it in these reports, but it doesn't seem likely. CPI scares have proven exceptionally rare during the past couple of years. The industrial production report for April will be released Friday. Industrial production looks to post an increase in the 0.3% area. But the specific April increase matters much less than what a couple of other indicators say about the likely path of production over the coming half-year or so.

The NAPM backlogs index hit 53% in April. It has tacked on a whopping 16 percentage points since December and now stands at its highest level since October 1997. A movement like this suggests that industrial production growth (on a year-over-year basis) could accelerate by a full percentage point over the next six months.

Recent factory orders reports show that, after three straight quarterly decreases, unfilled orders for durable goods rose 4.7% during the January-February-March period. Further, your narrator's (admittedly Homeresque) calculations point to a 4.4% second-quarter increase. Again, increases like this have in the past predicted acceleration in the rate of industrial production growth.

Aggregate business sales growth (the sum of sales growth at the manufacturing, wholesale and retail levels) has exceeded aggregate inventory growth by a bigger and bigger margin during each of the past six months. Indeed, this spread has grown from 0.4 percentage point in December to 3.2 percentage points as of April. Yawning gaps like this always lead to at least a modest production increase. Because sellers (a) must be growing less convinced that the long-heralded buying slowdown will set in anytime soon and (b) do not want to be caught short of goods heading into the crucial Let's-All-Buy-Loads-of-Toilet-Paper-Before-the-World-Ends season, the production increases this time around stand to surprise on the upside.

Bottom line.

For as long as capacity growth continues to decelerate (see a recent

column for details), bigger production numbers will keep the Fed rightly worried about too-big growth.

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