Inflation Stable, Consumer Spending Low

May 20, 2008--Inflation remained in check as consumers spending remained low in April and retail sales fell. Sharp declines in manufacturing and mining hindered industrial production, while, to the surprise of analysts, new residential construction spiked last month.

 

Consumer Price Index
The consumer price index (CPI) rose 0.2% for the month in April, after increasing 0.3% in March. Weak demand from consumers, coupled with indications that higher energy prices were not making their way into core inflation, kept inflationary pressures low. The core CPI, which excludes food and energy prices, inched up 0.1% for the month. On a year-ago basis, the top-line CPI has increased 3.9% while the core CPI is up 2.3%.

 

Retail Sales
In April, total retail sales fell 0.2%, after rising 0.2% in March. Decreased spending at auto dealers plunged 2.8%, leading the decline. Furthermore, spending at gas stations slipped 0.4%. Thus, core sales--those excluding the purchases of autos--gasoline station sales actually rose 0.6%. Building supply stores and electronic stores posted the largest increases, at 1.9% and 1.4%, respectively. On a year-to-year basis, top-line retail sales increased 2.0%. Consumers appear reluctant to spend on nonessentials, as record high energy prices, limited credit, and increasing unemployment take their toll.

 

Industrial Production
Industrial production decreased 0.7% in April, more than double the consensus estimate. A 0.8% drop in the both the manufacturing and mining components lead the decline. Significantly reduced auto production caused half of the fall in the manufacturing component. Capacity utilization also decreased and now stands at 79.7%. Utility output, however, posted a small increase of 0.3%. With continued weakness in residential investment, auto production, and the broader economy, expect industrial production to remain weak this quarter.

 

New Residential Construction
Surpassing analysts' expectations, new home starts surged 8.2% in April, increasing to 1.032 million units an annual rate in April, accompanied by a decrease of 4.9% in housing permits.  Compared to April of 2007, housing starts are down 30.1%. The housing market remains soft, even with lower mortgage rates, as the ongoing credit crisis continues to deter potential buyers. Moreover, April's National Association of Home Builders housing market index of builder optimism fell for the first after remaining flat for three months.