Empire Manufacturing Kicks Off Weak Q3 GDP, CPI Lower Than Expected On Gas Price Drop As Core Price Increase Continues

Tyler Durden's picture

So much for the Empire Manufacturing index being a harbinger of an economic pick up. With virtually everyone on Wall Street expecting a positive print, with the average at +5.00, the actual number of -3.76 comes as yet another confirmation of the (f)utility of Wall Street groupthink. While it was a modest bounce from the June -7.79, this first July manufacturing indication, which coming negative means the contraction is now well into its second month, and has ugly undertones for Q3 GDP, which we expect most banks will revise their expectations lower in the aftermath of yesterday's JPM downgrade of the US economy. And while there was some good margin news with Prices Paid dropping by 13, or more than Prices Received which declined by 6 points, a far more troubling indicator this month is the collapse in the Number of Employees Index to 1.11 from 10.20, or the lowest of 2011. This is not good for July NFP numbers after the already atrocious June employment data. Elsewhere on the inflationary front, CPI missed expectations of a -0.1% drop, instead printing at -0.2%, the lowest since June 2010. The reason was the 4.4% plunge in the Energy Index, the largest drop since December 2008. That said, the core CPI was unchanged at 0.3%, higher than expectations of 0.2%, due to increases in prices for shelter, apparel, new vehicle, used cars and trucks and medical care. In other words: all the things that people need right after food and gas. We would venture to guess that in addition to S&P < 1,000, core CPI coming in negative is the other QE3 gating factor.



More on the CPI from the release:

The gasoline index declined sharply in June, falling 6.8 percent. While this decrease was the major factor in the seasonally adjusted decline in the all items index, the index for household energy declined as well. In contrast, the index for all items less food and energy increased 0.3 percent for the second consecutive month. The indexes for shelter, apparel, new vehicles, used cars and trucks, and medical care all continued to rise in June.

The food index increased as well, although the 0.2 percent rise was the smallest of the year. The index for food at home increased 0.2 percent, with major grocery store food groups mixed. The indexes for fruits and vegetables and for meats, poultry, fish, and eggs both declined, and while the other major grocery store food group indexes all increased, none rose more than 0.6 percent.

Yes, energy declined but food prices continued to rise:

The energy index, which fell 1.0 percent in May, declined 4.4 percent in June, the largest decline since December 2008. The gasoline index, which fell 2.0 percent in May, declined 6.8 percent in June. (Before seasonal adjustment, gasoline prices fell 5.8 percent in June.) Despite the recent declines, the gasoline index has increased 35.6 percent over the past 12 months. The index for household energy also decreased in June, falling 1.2 percent after rising 0.5 percent in May. The index for natural gas rose 0.4 percent, but the electricity index declined 1.6 percent and the index for fuel oil fell 2.2 percent. The household energy index has risen 2.8 percent over the last 12 months, with the fuel oil index up 37.3 percent and the electricity index up 1.5 percent but the index for natural gas down 0.8 percent.

The food index rose 0.2 percent in June after rising 0.4 percent in each of the prior two months. The index for meats, poultry, fish, and eggs turned down in June, falling 0.4 percent after increasing more than one percent in each of the previous four months. The fruits and vegetables index declined for the third month in a row in June, falling 0.3 percent as the fresh vegetables index continued to decline. In contrast, other major grocery store food groups increased. The index for cereals and bakery products rose 0.6 percent in June, and the dairy and related products advanced 0.5 percent, as did the index for other food at home. The index for nonalcoholic beverages increased 0.3 percent as the coffee index continued to rise. The index for food at home has risen 4.7 percent over the last 12 months, with all the major groups increasing 3.2 percent or more. The index for food away from home rose 0.3 percent in June after rising 0.2 percent in May.

And yes, owners' equivalent rent of primary residence continues to surge as the housing "inflation" story persists in the alternative to owning.

Goldman's take:

1. The overall Consumer Price Index (CPI) declined by 0.2% (mom) in June, reflecting lower energy prices. However, beyond this component the report showed firm inflation trends. The core CPI rose by 0.3% (0.254% unrounded), more than the consensus forecast. In contrast to our expectations, inflation in vehicle (+1.0% mom) and apparel prices (+1.4%) remained quite strong. In addition, owners equivalent rent inflation accelerated to +0.15% from +0.10% last month (inflation in rent of primary residence was about unchanged). We continue to believe that recent high core readings partly reflect the impact of temporary factors-for instance, high commodity prices in the case of apparel and supply chain problems caused by the events in Japan in the case of vehicles. However, the higher trend has now persisted for some time (the six-month annualized change in the core is +2.5%).

2. The Empire index rose merely 4 points (from -7.79 to -3.76) in July, falling short of expectations which looked for an increase to +5. The composition of the report was mixed: new orders declined by around 2 points to -5.45 but shipments rose by around 10 points to 2.22. The employment index and the inventory index declined (down 9 points to 1.11 and down 7 points to -5.56, respectively).