We got a plethora of news last week. The beige book came out along with CPI, the unemployment numbers and a interesting look at the trade deficit.
The summary of the beige book showed that reports from the twelve Federal Reserve Districts indicated subdued growth in economic activity from mid-November through early January, with little change in overall conditions relative to the last survey period. Most Districts characterized growth as “sluggish” or economic activity as “soft” or “subdued.” The weakest report came from Dallas, where economic activity “remained anemic.” As in the last survey, conditions in the New York, Philadelphia, and Cleveland Districts were more favorable overall than in other Districts, with each, especially New York, describing various signs of improvement.
Reports on consumer spending were consistently weak, with disappointing holiday sales that, in nominal terms, mostly were at or below last year’s levels. Automobile sales surged at year-end in response to favorable sales incentives. Manufacturers expanded production a bit on balance, with notable gains for defense-related and biomedical products. Providers of nonfinancial services saw little change in existing weak demand, and business travel remained slow, although there were some reports of improved performance in the tourism sector. Home sales and residential construction activity remained at high levels but slowed a bit in some areas, and the widespread overhang of commercial real estate persisted. Agricultural production was hampered by adverse weather in some areas and performance was mixed. Extraction activity in the energy sector responded very little to sharp increases in energy prices. Bank lending continued to expand in most Districts due to strength in consumer and real estate borrowing. Labor demand was mostly flat, and despite rising costs for employee benefits and some inputs, increases in employee compensation and final prices were held down by competitive supply conditions.
We also saw U.S. consumer prices rose slightly in December but ended the year on a tame note, the Labor Department said in a report on Thursday that underscored the lack of inflationary pressures in the U.S. economy. Consumer Price Index, the most widely-watched gauge of U.S. inflation pressures, gained a seasonally adjusted 0.1 percent in December. It also posted a 0.1 percent increase outside of the volatile food and energy categories.
For the year, overall prices rose 2.4 percent, the biggest gain since 2000. But outside of food and energy, prices were up a much smaller 1.9 percent, the smallest increase since 1999.
In December, energy prices were down for a second consecutive month, dipping 0.4 percent. Clothing and transportation costs also fell, the latter mostly because of lower prices for new vehicles. Most categories of goods and services posted only modest price increases, with the largest gain coming in the medical care area, which showed a 0.3 percent gain.
A separate report, also by the Labor Department, showed initial claims for jobless benefits fell by an unexpectedly large 32,000 to 360,000 in the week ended Jan. 11. The level was much lower than Wall Street economists had been expecting but a Labor analyst warned that adjustments intended to deal with seasonal fluctuations in claims may have had a downward impact on the numbers. Should claims continue to remain below the key 400,000 level, they will be seen as showing an improvement in the lackluster U.S. job market. U.S. unemployment held steady at 6.0 percent in December.
Another report by Labor said inflation-adjusted earnings for nonsupervisory private workers outside the farm sector were flat in December, after November’s revised 0.1 percent gain.
The U.S. trade deficit will probably set record highs over the next two years despite sluggish economic growth, a Reuters poll found, as U.S. consumers continue to outspend shoppers in other countries.
While official U.S. international trade balance data for 2002 won’t be released for another month, economists say it is a foregone conclusion that last year’s trade deficit will break the current record of $365.5 billion hit in 2000. Already, the trade deficit from January through October 2002 stands at $350.2 billion.
In times of recession and slower economic growth, trade deficits typically narrow as consumer spending weakens, and as a weak economy tends to undermine the value of the dollar, imports become more expensive and exports cheaper for foreign buyers.
While U.S. economic growth remains sluggish, economists are quick to point out the economies of many of America’s major trading partners are growing even more slowly, leading to slack demand overseas for U.S. goods, services and financial assets.
However, forecasts for the U.S. trade deficit might have been even larger in the future were it not for the moderating pace of U.S. consumer spending.
Economists said a widening U.S. trade deficit over time puts downward pressure on the value of the dollar. In the 1990s, huge demand for U.S. assets such as stocks and bonds helped fill the gap left by outflows of dollars for goods and services. But with the stock market trading sluggishly, foreign investors have been less eager to fund the huge trade deficit. The dollar has lost 16 percent of its value on a trade-weighted basis since its 2002 peak in February. The trade deficit does remain a problem for the dollar unless you get other sources of capital flow and we know that capital flows have slowed significantly
Sources: Fed Beige Book, AP, Reuters, Economist, WSJ, and other news organizations.