By Simon Kennedy and Andrew Williams, BridgeNews
Washington--Jan. 12--The latest batch of December economic data may have surprised some with its unexpected strength in core producer prices and automobile sales, but it contained enough weakness to persuade the Federal Reserve to cut interest rates again Jan. 31, analysts said Friday. Most anticipate the central bank's policy-makers to match the shock 50-basis point rate cut of last week when they meet at month's end.
* * * While not posting the drop many had projected, Commerce Department data showed U.S. retail sales still rose just 0.1% in the final month of the year amid a drop in holiday season sales at department stores and a mild recovery in activity at auto dealers. Auto demand had been expected to fall following bleak sales reports from the nation's producers.
In a separate report from the Labor Department, strong increases in prescription drug, light truck and alcoholic beverage prices pushed the core U.S. producer price index up an unexpected 0.3% in December, overshooting the forecast of 0.1%. But because of a sharp drop in petroleum prices, the overall PPI was unchanged, coming in beneath the expected 0.1% increase.
"There was a bit of a surprise on the core PPI but (it) shouldn't ripple into consumer prices and other measures were weak so I'm not nervous about that," said Michael Gregory, economist at Lehman Brothers. "As for retail sales, despite the fact auto sales didn't drop there were backward revisions for past sales data so the retail sector ended the year in dismal shape keeping the Fed in play. They'll cut by 50 basis points at the next meeting," Gregory said.
Retail activity has been dampened lately by a combination of slipping consumer confidence resulting from lower stock prices, higher energy bills and a colder-than-normal winter. Sales dropped a revised 0.5% and 0.1% in November and October respectively to underscore that softness.
The Fed cited such weakness Jan. 3 when it jolted financial markets in cutting 50-basis points from its key interest rate in an action taken between meetings. Having indicated it stood ready to lop borrowing costs again down the road, analysts believe it will act again at the end of the month.
"If you take November and October sales into account the retail report was actually weaker than first thought," said Stan Shipley, senior economist at Merrill Lynch. "The Fed will see economic growth was around 2% in the fourth quarter and in the ones (1%) into the year and so the appropriate response to that will be another 50-basis point cut in January."
Some analysts expressed surprise that auto sales had risen 0.3% in December, the same month in which domestic auto dealers had said their unit sales dropped to 2-year lows.
"It is interesting in that this suggests there was less discounting than expected," said Carol Stone of Nomura. She expects the Fed to trim interest rates by 25 basis points this month.
The Fed is generally perceived to have room to maneuver thanks to the general lack of price pressures in the economy. Although core wholesale prices--excluding food and energy costs--rose in December, Joel Naroff of Naroff Economic Advisers argued that there did not appear to be any cost pressures that would fan inflation.
"Some may look at the large jump in the core PPI and worry," he said. "There really is no reason to do that. Wholesale costs are not pressuring producers significantly. The Fed should read these numbers with some confidence that if they continue to cut rates, inflation should not flare up."
But Chris Low of First Tennessee Capital Markets warned the central bank would remain "mindful" of inflation. End Copyright 2001 Bridge Information Systems Inc. All rights reserved.