INDICATOR: January Industrial Production and Import/Export Prices
KEY DATA: IP: -0.3%; Manufacturing: -0.8%/Imports: +0.1%; Nonfuel: +0.3%; Exports: +0.2%; Farm: -0.5%
IN A NUTSHELL: "The current economic slowdown, that hopefully can be blamed on the weather, is widespread."
WHAT IT MEANS: January can be a cruel month and this year it is especially so. Job gains were mediocre, unemployment claims are above where we would like to see them, retail sales were pathetic and not surprisingly, manufacturers reacted by cutting back production sharply. Industrial production was off moderately in January but only because utilities had to produce massive amounts to heat our homes, offices and plants. Manufacturing output tanked as fifteen of the nineteen industry groups posted declines. I guess you can say that is broad based. With dealerships snowed under and sales moderating, there was very little reason to assemble lots of vehicles and the makers didn't. Auto and light truck assemblies dropped over nine percent. The only bright spots were computers and machinery. Firms that are investing don't worry about a couple of months of bad weather.
On the inflation front, while there is currently not a lot, that could change a little. Import prices jumped in January as food costs are beginning to accelerate. A wide variety of consumer goods prices were up as well. Vehicle costs, though, continue to be well contained. Firms looking to invest are finding that capital goods prices did rise but they are still down over the year. As for exports, farm prices are dropping like snow - constantly. They are off nearly six percent from January 2013 levels.
MARKETS AND FED POLICY IMPLICATIONS: The January economic numbers have been uniformly bad. While some may blame it on the bossa nova, I say it's the weather. Okay, cabin fever is getting to me. I am also dating myself. Regardless, it is way too early to judge the state of the economy on the basis of January data, not with the bad weather we have faced. Given that the conditions have persisted through the first half of February, don't be surprised if this month's numbers don't look particularly good. But there is something different going on with consumer confidence. The latest Bloomberg and University of Michigan surveys shows that people have not become depressed by the winter. That confidence is holding up is a sign that the underlying economy is probably still pretty decent. That should buoy investor confidence a bit. The set of numbers that should be watched carefully are the import price data. Falling prices of imported products have restrained inflation, providing the Fed with every good reason to remain very aggressive. The slow but steady tapering is not putting a lot of pressure on the markets and with inflation tame, the Fed can go at any pace it wants. But if the economy starts accelerating, as I suspect is will once we get to the spring (if it ever comes), then inflation is likely to increase. At that point import costs will take on an even greater level of importance. Still, inflation issues are well into the future and I suspect the Fed members would like to see the rate rise to or even above their target of 2%.