Category Archives: Import and Export Prices

Economic Indicators, Import and Export Prices

March Import and Export Prices

KEY DATA: Imports: -0.3%; Nonfuel: -0.4%; Exports: +0.1%; Farm: -1.7%

IN A NUTSHELL: “Declining import prices provide fuel to the argument that the Fed doesn’t have to worry about inflation, at least for now.”

WHAT IT MEANS: The debate over when the Fed should or will raise rates continues to rage as the hawks and doves weigh in on an almost daily basis. If you believe the Fed members, rates should either be increased in June or next year. I guess that is a tight shot pattern when it comes to Fed policy. Just kidding. In any event, since the Fed claims to be data driven, what do the numbers tell us about potential Fed actions? Well, on the inflation front, there doesn’t seem to be much to worry about. Import prices fell in March and once again, fuel was not the driving factor. Indeed, for the seventh month in a row, nonfuel import costs declined. Every major category, included food, was down. Nonfuel import prices are of by 1.9% over the year, a clear restraint to any attempt by U.S. firms to raise prices. As for our exports, the farm sector continues to be battered by lower prices – they are down 13.5% since March 2014. Only fish prices are up.

MARKETS AND FED POLICY IMPLICATIONS: Controlling inflation while keeping growth solid is the Fed’s dual mandate. With the dollar strong, import prices are likely to be well contained, limiting to an extent domestic inflation. That can allow the Fed to focus more on growth, at lest that is the argument that the doves are making. The hawks simply say that the stronger dollar and low energy prices are transitory factors keeping prices low. Continued trend or above trend growth, coupled with a tightening labor market, improving worker incomes and the eventual turnaround in the dollar and energy prices imply that rising inflation is not that far off. Who will win the debate? My view is the data will firm sharply over the next two months. That may come too late for a June increase, but not for a July or September one. What worries me about the public discussion, especially by non-Fed commentators, is the apparent broadening of the perceived Fed mandate. Those that worry about the dollar argue the Fed cannot raise rates because it would further increase the dollar, lowering exports and restraining inflation and growth. Those that are focused on the equity markets argue that a rate hike would shock the markets, causing a correction so the Fed has to make equity prices a concern. The bond market gurus say that negative interest rates around the world make it impossible for the Fed to raise rates or limit its capacity to do so, implying that the bond market should control Fed actions. So now the Fed seems to actually have a quintuple mandate: Control inflation while keeping the economy solid, equity prices high, the dollar from getting too strong and limiting the impact on bond markets. Huh? People, we are approaching the six-year mark for this expansion. The post-World War II average is 5 years. The last three expansions averaged almost 8 years, with the longest being 10 years. In other words, one other thing the Fed has to consider is that the next recession could occur within a few years and if rates are not up by then, it will be forced to resort, once again, to non-traditional policies. The Fed has to raise rates back to more normal levels and the longer it waits, the faster it will have to act.

Economic Indicators, Import and Export Prices, Retail Sales

December Retail Sales and Import Prices

KEY DATA: Sales: -0.9%; Gasoline: -6.5%; Internet: -0.3%/Import Prices: -2.5%; Nonfuel: -0.1%; Exports: -1.2%; Farm: -0.7%

IN A NUTSHELL:  “It doesn’t look like consumers shopped ‘till they were tired, let alone ‘till they dropped in December.”

WHAT IT MEANS:  In the critical holiday shopping season, it doesn’t look like the urge to splurge took hold.  Retail sales fell in December, but that was not a shock.  We knew that vehicle purchases had come down from unsustainable heights to more reasonable levels and gasoline prices had crashed.  These data are not adjusted for prices, so the decline in gasoline purchases was likely a price issue.  But there were weaknesses in other categories.  Electronics and appliance demand, which had been largely going nowhere, turned negative.  You mean everyone didn’t go out and buy a curved screen TV for a couple of grand?  Prices were low but there are no affordable new products that have caught peoples’ attention.  Phone sales seemed to be solid, but I guess not good enough.  The milder winter, at least compared to last year, probably helped create the sharp drop in Home Depot/Lowes type stores.  Households bought less clothing, sporting goods and general merchandise as well.  But we did spend more money on food – both at home and away – as well as on furniture.  That was it.  Not a lot of shopping went on.

On the inflation front, there is none.  Import prices fell sharply as energy drove the decline.  Excluding fuel, costs were off modestly.  Consumer and capital goods costs edged downward while vehicle prices were flat.  Unfortunately, food costs keep rising and that is not good news for the consumer.  On the export side, prices were down pretty much across the board, led by a huge drop in energy and a sharp decline in agricultural prices.

MARKETS AND FED POLICY IMPLICATIONS:  Rising consumer optimism, more jobs and lower energy costs were expected to create a really good holiday shopping season.  It doesn’t look like that happened.  I guess for all those workers who didn’t see any increase in incomes, buying a whole lot more was not in the cards.  We need better wage gains so the 147 million people employed have more money in their paychecks.  That still is not happening, so business people who are disappointed by the economy should keep in mind that if they don’t pay their workers more, their workers cannot spend more.  The other thing to remember is that the additional money left in peoples wallets when they leave the gas station is relatively small.  It takes time for the impact to build up.  Thus, while spending should rise, don’t expect it to surge. So, what do these reports mean for the markets and the Fed?  Investors will not like the retail sales report as it relates to earnings.  But a solid but not robust economy, coupled with no inflation means the Fed can be very patient.  That should assuage some of the angst.  Regardless, I have no idea what is driving investors at any given moment these days and given the volatility, I don’t think anyone does.

Economic Indicators, Import and Export Prices, Retail Sales, Weekly Jobless Claims

November Retail Sales, Import Prices and Weekly Jobless Claims

INDICATOR: November Retail Sales, Import Prices and Weekly Jobless Claims

KEY DATA: Sales: +0.7%; Excluding Vehicles: +0.5%; Gasoline: -0.8%/Non-Fuel Import Prices: -0.2%; Fuel: -6.7%/Jobless Claims: 294,000 (down 3,000)

IN A NUTSHELL:   “A firm labor market is helping power stronger retail sales and it looks like we are having a very, merry holiday shopping season.”

WHAT IT MEANS:  Apparently, the reports of the consumers’ demise are premature.  The National Retail Federation was downbeat about Black Friday demand, but with sales running a week or two and Cyber Monday lasting a week, it appears households are shopping ‘till they are at least tired.  Retail sales soared in November and it wasn’t just the jump in vehicle purchases that propelled revenues forward.  Excluding vehicles, sales were still strong even when gasoline was included.  Declining prices led to a sharp drop in fuel purchases and excluding that portion of sales makes the rise even greater.  Indeed, the increases were essentially all across the retail landscape.  People even went to furniture and department stores, two areas that had been lagging. 

On the inflation front, the Fed has nothing to fear, unless they are hoping for higher inflation, which the members are.  Import prices fell in November and the declines were also across the board.  There was even some relief on the food side, which had been running counter to most other import prices.  A strong dollar is probably helping foreign companies grab for market share by lowering prices.

As for the labor market, another number, another indication that the November jobs report, while high, was not a total aberration.  Jobless claims continue to moderate and there is little reason to think that the December payroll increases will be weak.  The levels are consistent with job gains in the 250,000 range and a steady fall in the unemployment rate.  Only the return of frustrated workers can keep the unemployment rate from coming down consistently.

MARKETS AND FED POLICY IMPLICATIONS: It seems to be all coming together.  The labor market is continuing to improve, falling gasoline prices are adding to spendable income and households seem to be using that money to buy lots of things.  The holiday shopping season appears to be off to a very good start but we still have a couple of weeks to go.  Bad weather may create some ebbs and flows in the sales but I expect demand to be strong.  Last month I suggested that the holiday season could show upwards of a 5% rise and I am buoyed by the latest reports.  If we get anything close to that, we could have another quarter of GDP growth at or above 3.5%, confirming that the economy has shifted gears.  Next week the FOMC meets and it will be interesting to see how the members view the economy.  I think it is time to drop “considerable time” from the statement but whether that happens this month or next, it is coming.  The real issue is the first rate hike.  I think in spring the Committee will set the range around 25 basis points.  While that will not be a large move, it will signal the start of a long but steady process of rate hikes.

Economic Indicators, Import and Export Prices

September Import and Export Prices

KEY DATA: Imports: -0.5%; Excluding Fuel: -0.1%; Exports: -0.2%; Farm: -0.9%

IN A NUTSHELL:   “With energy prices cratering and the dollar strengthening, it is not a surprise that import costs are on the way down.”

WHAT IT MEANS:  While the Fed watches the labor market for signs of potential inflation, the rest of us are also looking at what we pay at the stores and those costs are going nowhere.  Import prices fell in September for the third consecutive month, led by declines in all sources of fuels.  But it was not just energy that was down.  The cost of foreign agricultural food products, industrial supplies and vehicles were also off.  Indeed, except for some large increases in meat and fish, import prices were generally flat or down.  Since September 2013, overall import prices are down nearly one percent while nonfuel costs are up only 0.5%.  As for our exports, the agricultural sector to reel from declines in the prices.  Farmers are seeing their incomes slide but just about every other exporter is feeling their pain.

On the labor market front, yesterday we found out that new claims for unemployment insurance eased again. Adjusting for the size of the labor force, we are now at record lows.  Firms continue to hold on to workers and they are starting to pay up for new workers.  In a new report, a Workforce Vitality Index, ADP reported that wages gains for those who change jobs is beginning to soar even as “stayers’” incomes remain stagnant.  That is not a stable condition, as it will encourage more people to start looking around.

MARKETS AND FED POLICY IMPLICATIONS:  The Fed is worried about inflation, but unlike some of the hawks, many think the real threat is disinflation.  There is absolutely no inflationary pressure coming from imports.  With Europe slowing and the U.S. energy sector surging, fuel costs are dropping.  Add to that the firming dollar, which allows foreign firms to either lower prices of keep them stable, and you have a prescription for tame inflation.  That confounds the labor market situation.  If firms have to not only pay up for new workers but also start raising wages of current employees to retain them, they face a dilemma:  Do they keep prices down to compete with foreign firms or do they raise prices to pay for the labor cost increases?  The Fed has a target of 2% for inflation and that means inflation needs to rise.  After all these years of low interest rates, it is very hard for the Fed to expand the economy and limit deflationary pressures.  The members would probably welcome increased wage and ultimately price inflation. 

Economic Indicators, Import and Export Prices, Retail Sales

August Retail Sales and Import Prices

WHAT IT MEANS:  The missing link in this economy is strong household consumption.  It’s hard to buy more when your pay is barely keeping up with inflation.  But wage gains are slowly improving and with so many more people working, income is growing.  The added funds are being spent on just about everything.  Retail sales jumped in August, led by a surge in vehicle sales.  With the vehicle sales pace of 17.4 million units being the highest in over eight years, that was hardly a surprise.  But even when you exclude vehicles, consumers were pretty frisky.  Demand for furniture, appliances and electronics, sporting goods, home building supplies, medical products and clothing were all up.  We even went out to eat again.  The only weak links were department stores and gasoline stations.  The decline in gasoline purchases was probably due to the sharp drop in prices, not a fall off in purchases, as these data is not inflation-adjusted.  All this came on top of an upward revision to July sales.

Household spending power is not likely to be eroded very much by inflation.  Import prices dropped sharply in August as fuel costs cratered.  Excluded energy, prices rose just a little, with only vehicles showing a gain, though that was minimal.  The only real trouble spot is manufactured food import costs, which continue to surge.  As for exports, U.S. firms are also getting less for their products with the farm sector once again suffering sharp drops in its goods.

MARKETS AND FED POLICY IMPLICATIONS: The second quarter is setting up to be pretty good.  Consumers are spending again and not just on vehicles.  Right now they are being helped by the drop in gasoline costs, which is leaving a lot more money in their wallets.  Indeed, low inflation is has kept consumption from largely disappearing and with import prices essentially going nowhere, minimal inflation pressures are likely to continue.  Once we get better wage gains, spending could really surge.  The Fed generally treats energy costs as an indicator of consumer spending, not inflation and it looks like the downward trend in prices and the upward trend in household spending should continue.  Since it is all about a tightening labor market and the potential for rising wages, this report should buoy the spirits of the inflation hawks who worry that the Fed is waiting too long to start raising rates.  The FOMC meets next week and the pressure is building for the statement to drop the words “extended period” when describing how long rates will be kept low.  That would provide the flexibility to start tightening sooner than expected.  I suspect that will happen, since the public discussion about doing that has largely taken away any shock that would occur if the statement actually drops that language.  As for investors, it is the usual: Does good economic news trump rising rates?  Who know what side of that coin comes up on any given day?

Economic Indicators, Import and Export Prices, Retail Sales

June Retail Sales and Import Prices

KEY DATA: Retail Sales: +0.2%; Excluding Vehicles: +0.4%/Import Prices: +0.1%; Excluding Fuel: -0.1%

IN A NUTSHELL:  “Consumer exuberance remains restrained and that raises questions about how strong the economy can or will grow.”

WHAT IT MEANS: The winter or our consumer discontent continued into the spring of our shopping boredom.  Most economists assumed that the weather drove down spending in the first part of the year but that would change dramatically as we got to the summer.  Well, spending is up but not nearly as robustly as forecast.  Retail Sales increased less than expected in June.  Strangely, vehicle sales fell.  I say strangely because unit sales hit their highest level in eight years in June.  After going crazy at the Home Depots of the world in April and May, demand for building supplies collapsed in June.   And since we weren’t shopping like crazy, we didn’t eat out a whole lot either.  But there were positive signs in the data.  Sales of food, clothing, sporting goods, health care products and appliances and electronics were up.  We shopped online and at general merchandise stores, so we really did spend some money.  These are the products that show up in the consumption component of GDP so we could see a decent spending number when the second quarter growth rate comes out on July 30th, the same day the next FOMC meeting ends.

Consumers can continue to buy lots of things, even with limited incomes, since inflation is well restrained.  We saw that again with the import price numbers.  The cost of foreign products rose minimally in June but most of the gains came from a jump in energy costs.  Food prices fell while the costs of consumer goods, capital equipment and vehicles were flat.  In other words, consumer purchasing power, at least when it comes to most imported products, is holding up.  On the export side, a similar pattern was observed as prices fell pretty much across the board.

MARKETS AND FED POLICY IMPLICATIONS: I keep saying we cannot get strong growth until we get strong income growth and so far we don’t have either.  Part of the problem with the expected rebound in spending is that some of the demand was lost forever.  If we didn’t go out to eat in February, we were not going to make up for that in June.  But another, longer-term change may be in the wind: The long-lasting, slow recovery may be eroding the “shop ‘till you drop” mentality.  People may be discovering they really can live without all the things they used to think were necessary.  Doing without for a short time may cause only temporary reductions in demand but cutting back for an extended period could change habits.  We will see what happens when income growth gets back toward decent levels, but we have to consider that the Great Recession and the Not-So-Great Recovery have modified spending patterns. With the Fed worried about disappointing growth, the decline in non-fuel import prices provides further cover to keep rates low for an even longer period of time.  Inflation is hardly a threat right now.  As for the markets, the focus of attention is where it should be, on earnings.

Economic Indicators, Import and Export Prices, Retail Sales

May Retail Sales and Import and Export Prices

KEY DATA: Sales: +0.3%; Excluding Vehicle: +0.1%/Non-Fuel Import Prices: 0%; Farm Export Prices: +0.5%/Jobless Claims: 317,000 (up 4,000)

IN A NUTSHELL:  “Consumers are out shopping but maybe not as much as hoped.”

WHAT IT MEANS: Households spent money in May but they were  hardly irrationally exuberant with their purchases.  Retail sales rose moderately but that came on top of an upward revision to the April gains so this report is somewhat better than it appears on the surface, or if you only looked at the headline number.  Robust gains in vehicle sales were expected to push total retail demand up more sharply but that was based on a modest rise that was initially estimated for April.  The previous month’s increase is now put at a very respectable 0.5% pace, not a mediocre 0.1% rise.  So far this quarter, retail sales are rising very solidly.  Outside the expected jump in vehicle demand, the rest of the report was a bit strange.  There were solid increases in furniture, building supplies and Internet retailers but weakness in electronics and appliances, clothing, department stores and food.   So it is unclear what people are thinking when they go out to shop.

On the inflation front, import prices remain pretty tame, especially when you exclude fuel.  We are beginning to see the pressure on food costs easing, which is good news for consumers.  Imported capital goods prices did tick up, but there is not a lot of pressure there, which is also the case with consumer goods.  On the export side, farmers are beginning to get some more money for their products, which is good news for the agricultural sector.

As for the labor market, jobless claims rose a touch but the level remains low enough that we are likely to see another very solid job gain when the June employment data are released.  We could also see the unemployment rate ease as well.

MARKETS AND FED POLICY IMPLICATIONS: We are having a spring rebound though it may not be quite as robust as we had hoped.  Consumer spending is clearly rising and another decent gain in June would cement the belief that households are once again playing their part in the recovery.  What will propel things faster, though, is some pay increases.  That seems to be coming as the low level of unemployment claims points to further tightening in the labor market.  But we are months away from the point where businesses will realize that conditions have turned.  After having dismissed worker compensation from their minds for so long, it may take a crisis before many executives recognize they have a real problem on their hands.  As for the markets, this should be a largely non-event.  With international issues playing a part in trader thinking, I suspect not much will be made of any of the reports released today.