by BusinessWeek, Standard & Poor's, and Action Economics staff
The U.S. economic picture remains murky, to say the least. Reports released Apr. 16 showed that consumer-level inflation remains steady, while the housing slump shows no signs of improvement. But a report on industrial production indicated surprising resilience for the factory sector.
The U.S. consumer price index (CPI) rose 0.3% in March while the core rate, which excludes food and energy prices, was up 0.2%, following flat readings in February. Markets expected readings of 0.4% for the headline rate and 0.2% for the core. The headline rate was steady at 4.0% year-over-year, but the core rate accelerated to 2.4% from 2.3% in the previous month.
Energy prices rebounded 1.9% after a 0.5% decline in February, and are rising at a 17.0% year-over-year pace. Gasoline prices rose 5.2% after a 2.0% February decline and are up 26.0% from a year earlier.
Inflation Adds to Fed's Concerns
While the acceleration in the core CPI rate over the last year, together with the strong March producer price index data released Apr. 15, is a concern, the data was about in line with expectations and is likely to have a modest impact on markets, according to S&P Economics.
Recent inflation reports have underscored the challenges for the Federal Reserve. "Ongoing hefty gains in headline prices will continue to needle [policymakers] despite the Fed's near-term focus on economic risk, as the Fed faces an inflation problem that may have greater shelf life than the problems in the financial industry," says Action Economics. At its two-day policy meeting later in April, the Fed will likely be revising down its growth estimates for its three-year forecast horizon, and it will also need to boost its overly optimistic estimates for inflation, according to Action.
"This boost in inflation risk may trim the size of the Fed's easing in April, though we will continue to assume a 50 basis point move," says Action Economics.
Feeble Housing as Recession Looms
U.S. housing starts plunged 11.9% to a 0.947 million annualized rate in March, though after an upwardly revised 1.075 million pace in February (1.065 million before). Markets expected a more modest fall to 1.003 million. Starts are down 36.5% over last year. Permits fell 5.8% to a 0.927 million pace, and are down 40.9% over last year.
The data show no real letup in the contraction for housing, and have boosted recession fears, according to S&P Economics.
Action Economics continues to expect existing home sales to fall by 1.2% to a 4.960 million-unit annual rate in March and new home sales to fall by 0.3% to a 0.588 million-unit pace.
U.S. industrial production rose 0.3% in March, better than the 0.1% expected decline, though after falling 0.7% in February (revised down from –0.5%). The capacity utilization rate rose to 80.5% from 80.3% (revised from 80.9%). Manufacturing production inched up 0.1%, despite a 5.4% drop in vehicle production. Excluding vehicle production, gains were widespread across industries. Utilities rebounded 1.9% after a 3.6% drop in February. Mining rose 0.9%.
Stocks surged and bonds edged higher on Apr. 16 on the mixed economic data, while the dollar was hammered by the notion that the reports indicate the Fed will be able to cut rates at its April policy meeting.