Economic Indicators up and Inflation Low Except for Metals

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“What’s sauce for the goose is sauce for the gander.”  I never did quite know what to make of that saying but somehow it sprung to mind when reviewing the Q4 trade statistics in a Financial Times article this week. The issue being that although the trade statistics show the trade gap has widened to 9.6% (not good) the underlying reason is positive, that is industrial and consumer growth is rising (is good). Manufacturing and consumer demand is coming back and sucking in goods and materials to feed a growing manufacturing sector and a recovering consumer market. The numbers are still modest and many are rightly treating them with caution not wanting to place too much faith on a few months of data but several pointers are trending toward a solid pick up in activity.

Economists at RDQ Economics were quoted in the article as saying that during the last three months of 2009, export volumes climbed at an annual rate of 36.2% and imports increased at an annual rate of 35.4%. In November, imports climbed by 2.6% to $174.6bn while exports ticked up by 0.9% to $137bn led by cars, parts and food. Higher industrial activity and consumer demand raised imports of industrial supplies and consumer goods but interestingly at the expense of China with whom the trade balance improved reducing the deficit from $22.7bn to $20.7bn.

Richmond Federal Reserve Bank president Jeffrey Lacker seemed to agree when he said he expected the economy to now expand at a decent clip and he saw the risk of inflation edging upwards renowned hawk that he is. Despite unemployment persistently sticking around the 10% number industrial production rose 0.6% in December and capacity utilization rose to 72% from 71.5% in November. That is still below the long term average and with gas prices rising slowing to 0.2%, the smallest gain in five months, it looks like inflation risks are still pretty low. While that remains the case for inflation, interest rates will remain low and consumer sentiment should steadily improve. Indeed the Reuters/University of Michigan Surveys of Consumers’ preliminary index quoted in a Reuters article of sentiment for January inched up to 72.8, from 72.5 in December. The reading was the highest in four months and suggests those in work are feeling less insecure and more comfortable about the future. In time that will feed through into more spending helping the economy to pick up and eventually bring down the unemployment rate.

Metals are one of the few inputs into the industrial cost structure that are showing inflationary elements. Many non ferrous metals doubled in price last year and although steel costs have recently eased they are likely to increase as the year unfolds. We could see factory gate prices rise this quarter for certain products where metal costs are a significant cost of goods sold. With the dollar still weak, imports have not been able to play much of a role in countering rising domestic costs and perversely some of the metal price increases have been as a direct result of the falling dollar fueling speculative investments in non ferrous metals and related commodities.

–Stuart Burns

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