Thursday, December 19, 2013

Another Soft Patch Ahead? (excerpt)

Businesses are building their inventories of merchandise and new homes. That activity boosted real GDP during Q3, and may be doing it again during the current quarter. The question is whether some of this restocking is voluntary or involuntary.

The recent weakness in producer and consumer prices suggests that some of it is attributable to slower-than-expected sales. To move the merchandise, producers and distributors are offering discounts. November’s surge in housing starts may also be outpacing demand, as evidenced by weak mortgage applications.

In other words, the rebound in the Citigroup Economic Surprise Index over the past 10 days might not be sustainable into the start of next year. I’m not turning pessimistic about the outlook for 2014. I am just raising a warning flag given the remarkable increase in inventories recently and weakness in pricing.

We will be closely monitoring Bloomberg’s weekly Consumer Comfort Index in coming weeks. It dropped from late September through early November, but seems to be on the rise again. I’m thinking that Obamacare could weigh on consumer confidence and spending at the start of the new year as more Americans realize that their out-of-pocket expenses for health care are likely to be higher in 2014.

Today's Morning Briefing: Build and They Will Come? (1) Restocking for the holidays. (2) Voluntary or involuntary? (3) Another soft patch ahead early next year? (4) Watching consumer confidence. (5) Auto dealers using incentives to reduce inventories. (6) Housing starts strong, but lack confirmation in permits and mortgage applications. (7) Pricing is weak, reflecting discounts and cheap imports. (8) Can the Fed boost inflation? (More for subscribers.)

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