Around the Street

Experts Talk CPI, Jobless Claims, Fed's Next Move


Businessweek.com compiles comments from Wall Street economists and strategists on the key economic and market topics of June 17.

Nicholas Tenev, Barclays Capital

The Philadelphia Fed Manufacturing Index sank to 8.0 in June from 21.4 in May, well below our [forecast] and [economists'] consensus expectation of 20.0. The component indices, which do not contribute directly to the headline index, were a bit more encouraging. The new orders index increased to 9.0 from 6.1, unfilled orders increased to -0.1 from -3.0, and the index of supplier delivery times jumped to 6.8 from -1.2. The inventory index increased to 4.6 from -7.9, while the shipments index slipped to 14.2 from 15.8.

The real weakness seemed to be in the labor market indices: The number of employees index fell to -1.5 from 3.2, and the workweek index slid to -1.5 from 7.0, suggesting slight decreases in payrolls and hours worked at manufacturers in this region. The prices paid index slumped to 10.0 from 35.5, and prices received dropped to -6.5 from 3.5. The headline index had been running well above most of the component indices for several months, and June's correction brings it more in line with the new orders index.

While the declines in the labor market indices raise some concern, the other components were consistent with continued strength in the Philadelphia-area manufacturing sector, and we expect further growth in the coming months, in line with the national trend.

Sam Bullard, Wells Fargo

The Consumer Price Index fell for the second straight month, down 0.2 percent in May. Prices excluding food and energy rose 0.1 percent. Inflation remains a nonissue in the near term.

For the second consecutive month, headline CPI declined, and it has fallen at a 0.7 percent annual rate over the past three months. Year over year, the CPI moderated to 2.0 percent and should continue to slow over the next few quarters. May's decline was attributable to the 2.9 percent decrease in energy, as gasoline prices in particular fell 5.2 percent. Food prices were unchanged on the month.

Following flat readings the prior two months, core CPI increased 0.1 percent in May. The increase was broad-based, with prices rising in apparel, medical care, motor vehicles, tobacco, and lodging. Over the past year, core CPI is up 0.9 percent.

Inflationary pressures remain benign. With economic slack still plentiful, the Fed continues to have the "green light" to keep monetary policy at very accommodative levels.

David Resler, Nomura Securities

U.S. initial jobless claims unexpectedly increased to 472,000 in the week ending June 12, from 460,000 in the previous week. … A Labor Dept. analyst told Market News International that part of the increase could have been due to seasonal factors related to the Memorial Day holiday. More broadly, claims remain stuck in a very tight range, varying from a low of 439,000 to a high of 490,000 since the start of the year. We believe this reflects the fact that although firing activity is now quite low, hiring activity is picking up only slowly. The total number of persons receiving jobless benefits declined to about 9.7 million, from about 10.0 million previously.

Overall, the latest claims figures suggest this month's Employment Report may once again point to a sluggish labor market recovery.

Sven Stehn, Goldman Sachs

A new analysis by the Federal Reserve Bank of San Francisco suggests that the Federal Open Market Committee (FOMC) should be in no rush to raise interest rates. It is based on an estimated "Taylor rule"—a description of how the FOMC has behaved in the past—which suggests that the first Fed funds rate hike would not take place before late 2012 when taken at face value and combined with the current FOMC economic forecasts. The paper casts doubt on the notion that worries about financial imbalances are likely to prompt an earlier "exit." However, it argues that taking into account the expansionary effects of the Fed's asset purchase program could pull forward the first rate hike to early 2012.

While the broad conclusions of the article are very much in line with our own analysis, there are some important nuances. On the one hand, our work shows that the expansionary stance of fiscal policy, taken by itself, argues for an earlier monetary exit than suggested by the San Francisco Fed study. On the other hand, our work implies that the Fed's asset purchases have had a somewhat smaller effect on financial conditions—and thus the timing of the first rate hike—than suggested in the San Francisco Fed study.

On balance, the two factors roughly cancel out, and we agree with the implication that an early fed funds rate hike appears unlikely even under the Fed's economic forecasts (let alone under our own).


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