CPI not bad, IP not good

On a seasonally adjusted basis, the CPI-U decreased 0.7 percent in December, the third consecutive decline. The index is now only 0.1 percent higher than in December 2007. Declining energy prices, particularly for gasoline, again drove most of the decline.

Excluding energy, the index was virtually unchanged for the third straight month. The index for all items excluding both food and energy also was virtually unchanged in December.

Excluding food and energy, the CPI declined at a 0.3 percent seasonally-adjusted annual rate (SAAR) during the last quarter of 2008, after increasing at rates of 2.0, 2.5, and 2.7 percent during the first three quarters. The volatile energy component of the CPI fell at a SAAR of 76.6 percent during the fourth quarter, driving an overall rate of decline of 12.7 percent.

For the 12 month period ending December 2008, the CPI-U rose 0.1 percent. This was the smallest calendar year increase since a 0.7 percent decline in 1954 and compares with a 4.1 percent increase for the 12 months ended December 2007. The “core” CPI (exclude food and energy) rose at a moderate 1.8 percent December to December.

As much as I suspect judgment calls, I am willing to say that there is enough good news below the energy-driven topside declines to rate this as a “mixed” report. The core numbers are within my somewhat arbitrary price stability parameters (+ or – 4 percent per year) and there is relative stability in about three-quarters of the major expenditure categories in monthly, quarterly, and annual time frames.

Real average weekly earnings rose by 0.6 percent in December 2008. A 0.3 percent increase in average hourly earnings and a 0.9 percent decrease in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) were partially offset by a 0.6 percent decrease in average weekly hours. Over the year, real earnings increased 2.9 percent.

While no one is happy with the hours component of this story, a substantial increase in real hourly wages and a pretty solid over-the-year increase in weekly earnings is hard to classify as anything other than good news.

Industrial production fell 2.0 percent in December, and declines were again widespread. For the fourth quarter as a whole, total industrial production decreased at an annualized rate 11.5 percent. Capacity utilization for total industry fell to 73.6 percent in December, a level 7.4 percentage points below its average level from 1972 to 2007.

Again, a report that doesn’t take a particularly keen judgment to classify as bad news. In historical perspective, the capacity utilization rate is as low as it got during the 2001 recession and five points below its trough in 1990-91.

With a good, a bad, and a mixed report, the good news index for January is at 17.9 percent. There are only a handful of reports left to go this month, and given that two of them are direct measures of the housing market, I’d not bet on this going up much as we close out.