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In today’s issue, inflation is firming but not yet concerning, U.S. industrial production was tepid last month but there are signs businesses are ramping up investment, the dollar hits a three-year low, the White House dismisses worries of an overheating economy, French unemployment tumbles, and American entrepreneurship languishes.
INFLATION WORRIES OVERHEATED?
Now that we have a big chunk of January’s data, it’s pretty safe to say inflation pressures are building. They’re not going crazy.
Consumer and producer prices out this week give economists a solid idea what’s going to happen with the Federal Reserve’s preferred inflation gauge, the personal consumption expenditure price index. Right now, it looks like the January reading will be one of the firmest monthly increases in the past few years but still leave the year-over-year level fairly tame.
Morgan Stanley is forecasting a year-over-year gain of 1.6% for core PCE and 1.7% for headline in January. J.P. Morgan sees 1.5% and 1.7%. That’s well shy of the Federal Reserve’s 2% target and should calm worries about any abrupt departure from plans to raise interest rates three or perhaps four times this year.
Indeed, the Fed hasn’t hit its target in 66 of the past 68 months. But will the pace of inflation pick up as tax cuts fuel the economy, the unemployment rate falls to multi-decade lows and remaining slack disappears? “That strengthening is raising the risk that Fed officials will have to step up the pace of tightening, raising the risk of a hard landing eventually,” says Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
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WHAT TO WATCH TODAY
U.S. import prices, another gauge of inflation, are out at 8:30 a.m. E.T. on Friday. Economists expect January to post a 0.7% rise from the prior month.
U.S. housing starts for January, out at 8:30 a.m., are expected to rise to an annual pace of 1.24 million, up from December’s 1.19 million. The housing market in recent months has been marked by strong demand, limited supplies and rising prices.
University of Michigan consumer sentiment for February, out at 10 a.m., is expected to remain solid at 95.0, down only slightly from January’s 95.7. If you want to stay focused on inflation, check the survey’s measure of consumer inflation expectations. These have been fairly tame, but a significant increase could trigger a self-feeding loop between expectations and reality.
And it’s always worth keeping an eye on markets. Early today, global stocks continued their rebound from a February rout, putting many major benchmarks on track for their best week in years. Ironically, it was fears of higher U.S. inflation that helped prompt the market fall, but when data this week actually showed firming inflation, markets rose. Elsewhere the global economy chugged along despite all the volatility, with the story remaining one of synchronized expansion across regions.
TOP STORIES
SILVER LINING IN INDUSTRIAL PRODUCTION
The Fed’s industrial production report for January was fairly disappointing, showing flat manufacturing output. Capacity use, a measure of slack, was still well below the economy’s average since the early 1970s.
But in one hopeful sign, output for business equipment jumped to the highest level on record. That suggests companies are confident enough to increase purchases of long-lasting goods, a long-anticipated development that could boost the economy’s growth and productivity down the road, Josh Mitchell reports.
If that’s the case, January’s industrial production setback should be temporary.
DOLLAR DOWN
The dollar fell to its lowest level in more than three years yesterday as renewed confidence among investors drew money away from the U.S. currency, Ira Iosebashvili reports. Improving fundamentals in Europe and Asia have also dented the U.S. currency.
A weaker dollar is a mixed blessing for the U.S. economy. Exporters will benefit as the price of their goods falls overseas. But companies that source materials or products outside the country and consumers will face higher prices. That, in turn, could feed inflation.
WHITE HOUSE: WE GOT THIS
President Donald Trump’s top economic adviser dismissed concerns that recent tax cuts and other stimulus would provide an excessive growth boost that causes inflation and eventually derails the economic expansion, Nick Timiraos and Richard Rubin report.
“We’re not worried about overheating in the economy. I know it’s what people are talking about,” said Gary Cohn, director of the White House National Economic Council.
Stock and bond markets sold off earlier this month after reports of rising wages and other price pressures fed investor worries that rising inflation would force the Fed to raise interest rates more aggressively than previously anticipated.
MEANWHILE, IN THE CAPITOL
The Senate failed to break its impasse over immigration yesterday after a week of debate, Kristina Peterson and Siobhan Hughes report. A flurry of unsuccessful votes left the chamber no closer to resolving the fate of hundreds of thousands of young, undocumented immigrants.
Both an immigration measure backed by President Donald Trump and a bipartisan proposal opposed by the president came up short in the Senate on Thursday afternoon. Two other amendments also failed. With no consensus on a long-term solution in sight, senators said they might try to attach to a spending bill next month a short-term patch shielding the young immigrants, known as Dreamers.
For now, though, U.S. immigration policy appears mired in partisan bickering and broader disagreements over who and how many people should be legally allowed to make a new home in the country.
ALLEZ LES BLEUS!
France’s unemployment rate fell to its lowest level since 2009 at the end of last year, a sign the eurozone’s economic recovery is broadening to areas that have long been stagnant, writes William Horobin.
The unemployment rate in France, the eurozone’s second-largest economy, dropped to 8.9% at the end of 2017 from 9.6% three months earlier. The unemployment rate declined for all age categories and for both women and men at the end of the year. Falling unemployment gives French President Emmanuel Macron a cushion as he pushes through controversial changes to the country’s labor laws.
CHART OF THE DAY: STARTUP SLOWDOWN
The American economy has long relied on fast-growing young companies to fuel job growth and spread the latest innovations. As recently as the 1980s and 1990s, a small number of young firms disproportionately contributed to U.S. employment growth, helping allocate workers and resources to burgeoning segments of the economy.
Much of that entrepreneurial energy has dissipated, which is a puzzle for economists and a drag on otherwise solid growth.
Here’s the latest evidence of a startup slowdown: The Census Bureau’s new high-frequency, up-to-date data on business formation. What the figures show is that formation of businesses likely to become job creators started to decline precipitously even before the Great Recession and still has not rebounded.
WHAT ELSE WE’RE READING
The WSJ has chronicled trucking companies’ rush to add capacity and trouble finding drivers. Economists at UBS dig deep into the industry’s struggles and expect the labor shortage to continue, in part because truck driving isn’t especially attractive in terms of overall pay and working conditions compared with other blue-collar industries like construction. A possible solution? “Given the cost bar of pulling truck drivers from construction in the current environment, to expand, the trucking industry may have to pull workers from nontraditional sources. The interesting possibility to us is retail trade.” Retail has the lowest average hourly rates of all industries and employment growth has slowed substantially. Of course, most retail workers wouldn’t be a good match for a big rig, but the retail sector’s employment is 10 times larger than trucking, so there are bound to be some willing to switch careers and able to retrain. (Sorry, no link.)
California Gov. Jerry Brown is known for thinking outside the box. The New York Times profiles his prophecies of economic doom despite a one of the longest expansions since World War II, a 17-year low for unemployment a multibillion-dollar surplus for the state budget. “What’s out there is darkness, uncertainty, decline and recession,” Mr. Brown said after presenting his final budget to legislators. California has accounted for about 20 percent of the nation’s economic growth since 2010, significantly more than its share of the population or overall output. But Mr. Brown, in his final year in office, has raised the question on the minds of those paid to think about the economy: How long can this last?
from Real Time Economics http://ift.tt/2o8wwSC
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