Week in Review - Highlights for the Week Ending January 14, 2011

MONDAY, January 10th


Chain store sales grew 3.1% in December from December one year ago, a bit weaker than expected. December sales lagged expectations somewhat as severe weather moved in late during the month but they followed a very strong November. Taken together this was the best holiday shopping season since 2006.

TUESDAY, January 11th

The small business optimism index, as reported by the NFIB fell to 92.6 in January from a reading of 93.2 in December. The level of the index suggests that small businesses remain cautious amid continued uncertainty in economic conditions. In short, small businesses are still not hiring. But, details in the data do show that businesses are expecting hiring and sales to improve in coming months.

WEDNESDAY, January 12th

The MBA mortgage applications index increased 2.2% to 482.7% for the week ending January 7. The purchase index fell 3.7% during the week as the refinance index climbed 4.9%. Refinance activity is down 56.1% since early October as contract mortgage rates began to increase. Quantitative easing should help lower rates and revive refinance opportunities in the near term. Home buying is well below it tax credit fueled April level and is only modestly above its lowest levels of the past 15 years. Purchase activity will recover rapidly once prices bottom out and distressed properties have been worked through the market.

The Fed's round up of economic conditions in the twelve Federal Reserve Banking Districts, known as the beige book showed that economic activity improved in most areas of the country in late November and December. There was a pick-up in activity in most sectors with both commercial and residential real estate remaining the most obvious exceptions. The forecast has brightened though with most districts expecting hiring to increase in 2011 and with that, improvement in housing will follow.

THURSDAY, January 13th

The producer price index surged 1.1% in December compared to expectations for a 0.8% rise. Increases in food and energy prices, up 0.8% and 3.7% on the month respectively, pushed wholesale inflation higher. Excluding food and energy prices, the core PPI rose 0.2% and is now just 1.4% higher on the year. Prices at earlier stages of production remain quite high but because of slack in demand have not yet been passed through to finished goods.

The international trade deficit on goods and services narrowed slightly to $38.3 billion less than an expected shortfall of $40.7 billion. Nevertheless, the trade deficit is averaging around $41 billion over the past twelve months compared to an average trade gap of around $31 billion in 2009. The widening of the trade deficit is usually associated with a recovering domestic economy and stronger demand for imports.

Jobless claims jumped to 445k for the week ending January 8 from a level of 410k in the previous week. The outsized gain put claims at their highest level since October. Weather and holiday effects usually result in high volatility this time of year. The four-week average of 416,500 is more indicative of current trend in unemployment claims.

FRIDAY, January 14th

Retail sales rose 0.6% in December less than an expected 0.8% gain. With this month's gain, retails sales have just passed their pre-recession November 2007 peak. However, nearly one-third of the increase in spending was due to higher gasoline sales and higher gas prices. Consumers continue to shop despite sluggish labor and housing markets and tight credit. Real consumption added 1.67 points to Q3 GDP and will add even more in the fourth quarter.

The consumer price index rose 0.5% in December led by soaring energy prices. Even with this gain, consumer prices are just 1.4% above their year ago level. Excluding food and energy prices the core CPI rose 0.1% on the month and is up 0.6% on the year. Soft final demand and financial deleveraging are disinflationary so core consumer inflation should remain subdued over the next several quarters.