Deflation Risks Fade, Manufacturing Slump Ease, and Confidence Improve
Deflation Risks Fade, Manufacturing Slump Ease, and Confidence Improve
Deflation risks are indeed fading away in the world’s largest economy, as CPI inflation came to confirm yesterday’s PPI at least on the core levels, while manufacturing activity seems to be recovering though contraction still persist, meanwhile confidence improved further as seemingly expectations over the outlook for the economy are improving.
The consumer price index for the month of April was flat following the prior reported drop of 0.1% and inline with expectations, while CPI declined by an annualized rate of 0.7% worse than the forecasted drop of 0.6% and following the prior drop of 0.4%. Core CPI on the other hand rose in April by 0.3% more than estimates for a 0.2% rise and the prior rise of 0.2%, while core CPI rose by an annualized 1.9% up from the prior and expected estimates of 1.8%.
Downside risks to inflation continue to threat the economy with a prolonged period of dropping prices, however deflation risks seem to be fading away especially as both the PPI and the CPI indicated that core prices rose in April.
Rising energy prices might prove to be helpful amid the ongoing recession, as inflation rates won’t fall drastically and accordingly deflation will be avoided, however the Fed must be careful since rising energy prices might dampen economic activity further and that would send any hopes of recovery tumbling.
Moreover, the Fed must be careful over the longer term outlook for inflation, as rising money supply would indeed lead inflation to rise, and the Fed must be prepared to face upside risks to inflation, especially since it’s going to represent the aftermath of all the credit, monetary, and quantitative easing taken so far.
On the other hand, the New York Empire manufacturing index for the month of May signaled that the manufacturing sector is heading back towards growth, as the index rose to -4.55 from the prior reported estimate of -14.65 and came well above median estimates of -12.00.
The prices paid index rose to -11.36 from -14.61, while the prices received index declined to -27.27 from -17.98, new orders declined to -9.01 from -3.88, while shipments rose to 1.29 from -1.79, inventories rose as well to -21.59 from -35.96, and the number of employees index rose to -23.86 from the prior estimate of -28.09.
The manufacturing sector has been providing increasing signs recently that it’s on its way back to recovery from the worst slump since the Great Depression, as the sector which indeed felt the heat from the ongoing crisis continue to show improvement all across the nation.
Moreover, the net long term TIC flows rose in the month of March to $55.8 billion from the prior revised estimate of $2.0 billion and above median estimates of $35.0 billion, noting that this indicator is used in the United States to cover up the deficit in the trade balance, as the trade deficit widened in March to 27.6 billion.
Industrial production was also released for the month of April and showing a continuous improvement, as the index declined by 0.5% following the prior revised drop of 1.7% and slightly better than median estimates of a 0.6% drop, while capacity utilization a measure for how much resources are being used by factories continued to decline, as it dropped to 69.1% from the prior revised estimate of 69.4%, but it came in better than median estimates of 68.8%, thus showing that spare capacity continue to rise as the ongoing recession continue to hammer economic activity.
Finally the University of Michigan released its confidence preliminary estimate for the month of May, confidence improved to 67.9 from the prior estimate of 65.1 reported back in April and also above median estimates of 67.0. The economic conditions index declined however to 66.2 from 68.3, but the economic outlook index rose to 69.0 from the prior estimate of 63.1.
The University of Michigan confidence index also provided some insights on inflation expectations, as the 1-year inflation expectations index declined to 2.6% from the prior estimate of 2.8%, while the 5-year inflation expectations index remained unchanged at 2.8 percent.
Conditions continue to improve seemingly in the United States; however one draw back might prove to be the rising unemployment rate which could stall any recovery in the near future, however optimism over the outlook might be justified, though we would advise everyone to remain cautious since the outlook is still full of uncertainties…
Ecpulse
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