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Economic Update April 14

Posted by Larry Doyle on April 14, 2009 12:57 PM |

We received a mixed bag of economic news this morning. The WSJ provides a quick but fairly comprehensive analysis, U.S. Retail Sales Show New Weakness; Producer Prices Drop

In regard to the wholesale prices, the WSJ reports:

The Labor Department’s producer price index for finished goods fell 1.2% on a seasonally adjusted basis in March, after rising 0.1% in February. Core PPI, which excludes food and energy costs, was unchanged last month from February.

The PPI data showed energy prices sliding 5.5% last month, after rising 1.3% in February. Food prices were down 0.7%.

Prices of passenger cars fell 0.2%, while light truck prices declined 0.4%.

“Today’s PPI report emphasizes that deflation rather than inflation remains the primary risk for now,” IHS Global Insight economist Nigel Gault said.

On the retail sales front:

Retail sales fell 1.1% compared to the prior month, the Commerce Department said Tuesday. Economists expected a 0.3% increase in the key indicator of consumer spending.

The big drop followed increases in January and February that had ended a freefall in spending during the second half of 2008.

“It’s disappointing,” said Hugh Johnson, chairman of Johnson Illington Advisors in Albany, N.Y. “It tells us quite clearly that consumers continue to retrench, or are doing less borrowing and spending and more saving.”

My sense is that the massive discounting of products after a horrendous holiday period supported sales activity in January and February. Additionally, expecations were that auto sales would have been stronger; however, the manner in which auto sales are accounted would indicate significant discounting in auto prices as well. Clearly every retail business is doing everything possible to move inventory.

To that end, the WSJ reports:

U.S. business inventories decreased by 1.3% in February to a seasonally adjusted $1.421 trillion, a Commerce Department report said Tuesday. The big drop came even as business sales rose 0.2% to a level of $994.9 billion and indicated businesses are starting to get control of inventories.

The inventory-to-sales ratio slid to 1.43, down from 1.45 in January, Commerce said. The gauge indicates how well firms are matching supply with demand. It measures how long in months a firm could sell all current inventory.

A year ago, the I/S ratio was 1.29.

“This suggests that, despite the recent declines in inventories, there is still an overhang of undesired inventories that needs to be worked off over the next several quarters,” Insight Economics analyst Steven Wood said. “This inventory liquidation will dampen overall economic activity.”

Add it all up and the economy is doing the best it can to move products while consumers are managing their own expenses in the face of rising unemployment. Both sides of the coin are acting totally rational. These numbers tell me we are managing as best we can but we are not turning the corner. Stock markets are down approximately 2% on the news.


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