Data preview for US economy: industrial production to rebound - Nomura
Analysts at Nomura noted the forthcoming US data and explained that they are expecting industrial production to rebound in December and steady advances in consumer prices.
Key Quotes:
Empire State Survey (Tuesday): The headline index from this survey jumped strongly to 9.0 in December from 1.5 in November. Forward-looking indicators in the December survey suggest that the surge in optimism may continue in the near term. Other business surveys are in line with this trend. The ISM manufacturing index improved to 54.7 in December after an elevated reading in November. However, hard data on real economic activity were mixed and did not improve as strongly as business and consumer sentiment. As such, we expect the headline index to decline slightly to 7.0 in January.
Industrial production (Wednesday): In November, IP recorded a 0.4% m-o-m decline. However, incoming data suggest that industrial output likely rebounded in December. Output from the manufacturing sector (ex-autos) likely improved as payrolls in this sector posted moderate gains and steady average hours worked. In the mining sector, we expect output to have improved as crude oil production and oil and gas rig count grew modestly from the previous month. Moreover, considering increased demand for heating we think utility output rose in December. Last, vehicle and parts production likely increased over the month. Altogether, we forecast IP rose by 0.6% m-o-m in December.
NAHB housing index (Wednesday): The NAHB housing market index jumped to 70 in December from 63 in November, implying a strong improvement in homebuilders’ sentiment. Incoming data suggest that this optimism may have continued into 2017. The index of the traffic of prospective buyers registered 53 in December, up 6 percentage points (pp) from the prior month, suggesting that homebuilders anticipated better demand in coming months. In addition, housing construction activity appears to have been steady as employment in this sector grew steadily over the month. All in all, we forecast homebuilders’ sentiment to remain elevated at 70 in January.
CPI (Wednesday): We believe that non-gasoline energy prices likely rose in December but at a slower pace than gasoline prices, which increased modestly by 4.6% on a seasonally adjusted basis in the month. As such, we expect a 2.3% m-o-m gain in the aggregate energy prices of the CPI.
On food prices, it appears that both food-away-from home and food-at-home prices increased at a solid pace of around 0.2% m-o-m. Although food-at-home prices (food prices at grocery and supermarket stores) had declined for seven straight months until November, the PPI’s price index for finished consumer goods showed a back-to-back increase in December, suggesting some stabilization of food-at-home prices. As for the food-away-from-home prices (restaurant menu prices), the other subcomponent of food prices, the recent tightening of labor markets for restaurant industries points to a solid increase in this metric in December. Altogether, our forecast for aggregate food prices is a 0.2% m-o-m increase.
Excluding food and energy prices, we expect core CPI rose by 0.2% (0.215%) m-o-m in December, a slight acceleration from 0.151% in November. If realized, this would represent 2.2% y-o-y growth, a 0.1pp increase from 2.1% in November. Drilling down, core goods prices likely fell again in December given imported consumer goods prices fell relatively sharply in the month. However, firming core service prices likely offset the softness in core good prices.
Among core service prices, we expect airline fares to have jumped strongly in the month. Based on ticket price data, air fares appeared to have increased by about 3.0% m-o-m on a non-seasonally adjusted basis. Yet, the seasonal fluctuation in air fares in November and December suggests that seasonal adjustment should amplify the month-on-month increase.
Considering the impact from seasonal adjustment, we expect a strong 8.8% m-o-m rise in air fares, adding 7bp to our core CPI inflation forecast. Excluding airline fares, core inflation would have been little changed. Combining our expectations for non-core and core components, our forecast for headline CPI inflation is 0.4% (0.361%) m-o-m, or 2.2% y-o-y. As for CPI NSA, we expect 241.674.
Beige Book (Wednesday): In preparation for policy discussions at the January FOMC meeting, regional Feds will gather anecdotal information on economic activities. Although some survey-based data derived from qualitative responses from firms have picked up in recent months, hard data calculated from quantitative information did not show strong evidence that economic activities actually gained any significant momentum. In this regard, the next print of the Beige Book might be helpful in understanding how much the psychological effect of the election result contributed to the recent improvement in business sentiment. Moreover, it could provide some industry-level evidence for the recent acceleration in wage inflation reported by the monthly employment report.
Initial jobless claims (Thursday): The latest reading of the initial jobless claims series was within the recent trend, in line with our view that labor market conditions remain tight and that involuntary lay-offs have been subdued. This series has been on a downtrend, although it has displayed some volatility around the holiday season. We would caution against reading too much into the recent fluctuation in this series.
Housing starts (Thursday): Housing starts fell by 18.7% m-o-m to an annualized 1090k in November, driven by a sharp decline in multi-family housing starts. In December, we expect some positive payback in multi-family housing starts. However, incoming data suggest that single-family starts may have slowed. In particular, aggregate hours worked in residential construction fell 1.3% in December, implying some slowdown in home building activity. Altogether, we expect housing starts gain by 0.9% to an annualized 1100k in December. We forecast building permits to see 2.3% growth to an annualized rate of 1240k in December.
Philly Fed Survey (Thursday): The Philly Fed index jumped strongly to 19.7 in December, which was revised downwards from 21.5 in annual revisions. The new orders index was elevated at 14.9 and the unfilled orders index was up 0.3pp to 3.6, suggesting that survey respondents had an optimistic near-term outlook. In contrast, incoming data on actual economic activity have not picked up strongly, suggesting that it may be possible that the slow improvement in real data could have affected post-election optimism. For this reason, we expect that the Philly Fed index did not improve further and forecast a print of 16.0 for January.