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Friday, January 18, 2013

Wells Fargo: Looking Past The Fiscal Cliff

Economic data this week generally pointed to stronger activity in December than expected. It appears consumers and businesses largely looked through the uncertainty surrounding the fiscal cliff to focus instead on the improving fundamentals of the economy. However, consumers’ resolve may weaken once they see their first paychecks of the year, while businesses are likely to remain cautious ahead of an agreement on the debt ceiling.
For now, consumers seemed to have shaken off their fears of the upcoming tax changes in the final shopping month of the year. Retail sales rose 0.5 percent in December, beating expectations for a 0.3 percent gain, and followed an upwardly revised figure for November. Excluding sales of gasoline, retail sales rose a more robust 0.8 percent. Auto sales posted the largest monthly gain of the major retail categories, rising 1.6 percent.
As expected, holiday sales improved more modestly in 2012 than in 2011. Retail sales less autos, gasoline and restaurant purchases for November and December rose 3.2 percent in 2012 versus 5.7 percent the previous year. Sales were up in most holiday categories this season, led by an 11.9 percent increase in sales at non-store retailers. However, general merchandise stores, which include department stores, saw sales decline 2.3 percent as shoppers increasingly made purchases online.
Industrial production came in as expected, rising 0.3 percent. The underlying details were more encouraging than the headline. Total production was lowered by a 4.8 percent decline in utilities output due to above-average temperatures in December. Manufacturing production looked more solid, rising 0.8 percent, with widespread gains across industries. Despite worries that the upcoming fiscal cliff would derail business investment, production on business equipment rose 1.3 percent. While December’s gain is encouraging, the first of the January PMIs leave the outlook for the manufacturing sector cloudy. The Empire Manufacturing Survey posted its sixth straight decline, while the Philadelphia Fed’s Business Outlook Survey showed manufacturing activity fell during the first month of the year. With the sequestration provision pushed back to March and the debt ceiling fast approaching, it is likely that firms will remain cautious in the near term until fiscal policy is further clarified.
Inflation pressures remained well contained in December due to lower energy prices. The Producer Price Index fell for the third consecutive month and has moderated to a 1.3 percent year-over-year pace. Broad consumer price inflation was flat in December, while core inflation ticked up 0.1 percent.
Housing starts data showed that the recovery in residential real estate is on a firm footing. Starts jumped to a 954,000-unit pace in December, a 12.1 percent increase over November. Some of the jump may have been attributable to regulatory changes set to take effect this year and seasonal noise, but the trend remains solidly upward. Starts rose 28 percent in 2012, while builder sentiment in January remained at its highest level since 2006 according to the NAHB/Wells Fargo Home Builder survey.

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