US economic analysis for the week of June 13, 2005
Rising oil prices are triggering alarms on Wall Street but a milder than expected inflation reading is tempering fears of more Federal Reserve (Fed) rate hikes.
The US stock markets are on weak footing as oil prices coasted above $56 per barrel. As expected, OPEC elected to raise
production 500'000 barrels per day (BPD) for a total daily output of 28'000'000 BPD, however, it is unlikely this change will do little to impact everyday oil prices for at least a few months.
At this point, most analysts widely believe it is almost solely oil which is holding the US economy back from complete and total recovery.
One needs look no further than the data released on the Consumer Price Index (CPI). The CPI fell 0.1% in May after rising 0.5% in April. The drop was spurred by a 2% drop in fuel prices. Economists previously believed the CPI would actually rise 0.1% in May.
Overall, the “core” CPI which does not factor in food and energy costs, rose 0.1% in May. It had been previously believed that it would rise 0.2%. The CPI news is promising as it indicates that inflation could be easing and the Fed may possibly end its cycle of raising interest rates.
The
manufacturing sector also showed signs of rebounding.
Reports indicate industrial
production increased by 0.4% in May after dropping 0.3% in April. Capacity utilization increased 0.3% to 79.4% which had been widely expected to remain unchanged. For the past twelve months, total
production has steadily increased 2.7% and
manufacturing output rose 0.6% in May. Meanwhile
production of motor vehicles remained unchanged.
In currency news, the dollar noted nearly imperceptible changes against the euro and yen on the heels of the CPI report.
As usual the health and state of the US economy hinges on what oil does. As the data shows, positive economic reports mean little when oil prices constantly dominate the investor's conscious. Clearly the US must act now rather than later to head off the havoc that the oil market is causing on the economy.
Reports indicate that the US Senate Democrats are preparing to introduce legislation that would cut US oil imports by 40% by 2025, the goal being to seemingly wean the American economy off its over-dependency on foreign oil sources.
Meanwhile President George W. Bush is urging the Congress to pass his proposed energy bill before the summer recess.
Regardless of what legislative actions Washington DC decides to take, the reality of high energy prices is self-evident in everyday life as prices of everything from a tank of gasoline to plastic materials to food items continue to reflect the subversive way that oil has penetrated nearly every facet of life.
All in all, the Fed's
opinion of the economy's pace of expansion is “moderate, solid, or well-sustained.” Though the rate of expansion is not consistent across all twelve of its districts, it is enough to give it cautious thumbs up.
Furthermore, it remains to be seen whether the CPI news will actually perpetuate itself over the next few months as the real meat of the CPI drop last month reflected an overall drop in fuel prices. Now that oil prices are again trending upward and the effect of an OPEC
production increase still months away, we may again see the CPI go up and there is still no guarantee that the Fed may not actually go through with plans to raise interest rates at least 0.75% by the end of the year. Whatever happens, it is almost a given that Fed will at least raise rates another quarter point this summer and maybe another quarter point by year's end.