Consumers Grow More Cautious in August–Vanguard’s Economic Week in Review

Posted on September 16, 2011. Filed under: -- Economic Week In Review | Tags: , |


It’s been a while since I posted these, so I thought I’d share Vanguard’s Economic Week in Review for this week. Enjoy!

Consumers grew more cautious in August amid wild stock market swings, zero
job growth, and heightened concerns the economy had weakened. While business
inventories and industrial production climbed, retail sales were flat as
consumer prices rose higher than expected. For the week ended September 16, the
S&P 500 Index rose 5.4% to 1,216 (for a year-to-date total return—including
price change plus dividends—of about –1.9%). The yield on the 10-year U.S.
Treasury note rose 15 basis points to 2.08% (for a year-to-date decrease of 122
basis points).

Consumer prices jump sharply

The Consumer Price Index (CPI) rose 0.4% in August, much more than expected,
led by increases in gasoline and food prices. Less food and energy, core
inflation surpassed its year-ago rate by nearly 2.0%—the upper boundary of the
Federal Reserve’s target inflation rate—as vehicle and apparel prices continued
to rise.

“There aren’t many elements to support these upper-range core CPI readings
going forward,” Vanguard senior economist Roger Aliaga-Díaz said. “There’s no
evidence of monetary roots to this inflation reading, as banks continue to build
up cash reserves and lending remains stagnant. Thus, the Fed may not feel
constrained to act based on this inflation measure.”

Meanwhile, prices for finished goods in August were unchanged. Analysts had
been predicting a significant decline. Prices for finished energy goods dropped
1.0%, the third consecutive monthly decline. Excluding food and energy, core
prices for finished goods rose 0.1%. Producer price inflation for service
industries also gained slightly.

“There’s no evidence of production cost pressures, either,” Mr. Aliaga-Díaz
continued, “as producer price inflation and import price inflation remain
moderate. With slower global economic growth ahead, we may well see core
inflation gradually receding.”

Inventories and production continue their upward climb

Business inventories grew for the 19th straight month in July, although the
gain was less than expected. Now that the Japan supply-chain disruptions have
faded, analysts had been anticipating a significant rise in auto inventories
rather than the 0.4% increase reported.

Industrial production rose 0.2% in August—its fourth consecutive monthly
gain. Combined with a solid 0.9% July increase, average industrial production
for both months was 4.6% (annualized) above the second-quarter average. Mining
output rose a sharp 1.2%, its sixth consecutive monthly increase and the
sector’s highest output since 1998. Manufacturing also continued to rise, led by
continued growth in automobile production. Overall industrial production
strength was offset by weakness in the utility sector, which fell 3% in August,
reversing its 2.8% July increase.

Retail sales fall flat in August

Consumers apparently hunkered down during August as retail sales were
unchanged. Miscellaneous and clothing retail sales dropped most, declining 2.2%
and 0.7%, respectively. Gasoline sales rose, although by much less than they had
in July. Meanwhile, sporting goods stores saw the biggest advance—a 2.4%

The economic week ahead

House building and sales reports are set for release next week: new
residential construction on Tuesday and existing-home sales on Wednesday. The
Federal Open Market Committee’s monetary policy report will also appear
Wednesday, and leading economic indicators are scheduled for Thursday.

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