<Economy>Low inflation,lean inventory-I love it.
Kemble:
Things are looking good,honest.
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U.S. Inflation on Track for 12-Year Low, Manufacturing May Pick Up Speed
U.S. Economy: CPI at 12-Year Low, Inventories Lean (Update3)
(Adds latest markets in 11th paragraph.)
Washington, Dec. 15 (Bloomberg) -- U.S. inflation is on
track for its smallest yearly increase in 12 years and companies
are keeping inventories lean, suggesting manufacturing may pick
up next year, government reports show.
The consumer price index rose 0.2 percent in November,
matching October's rise, as dropping fuel prices offset increases
in the cost of housing, food and medical care, Labor Department
figures showed. That put the CPI on course for a 1.6 percent rise
for all of 1998 -- below last year's 1.7 percent increase and the
lowest since a 1.1 percent increase in 1986.
A separate report showed businesses added inventories at a
slower pace in October than a month earlier as robust retail
sales caused retailers to pull merchandise out of warehouses to
satisfy demand. Inventories rose 0.3 percent in October after
increasing 0.6 percent in September, Commerce Department figures
showed. Total business sales rose.
''Low inflation is just part of this best-of-all-worlds
scenario in the U.S.,'' said William Cheney, chief economist at
John Hancock Mutual Life Insurance Co. in Boston. ''Your income
looks better and better and it contributes to real purchasing
power. We're probably going to have a Merry Christmas'' and
strong sales early next year.
General Electric Co., the second largest U.S. company in
market value, expects a strong 1999, with earnings rising at
least 14 percent, said analysts who attended a closed-door
meeting with Chairman John F. Welch Jr. GE makes locomotives,
airplane engines and kitchen appliances and also owns the
National Broadcasting Company and the world's largest non-bank
finance company, GE Capital Services Corp.
..............................
Even so, the overall message for the economy is that while
there may be some moderation in business equipment purchases,
''growth in capital spending will be significant in 1999'' as
companies strive to boost productivity by investing in computers
and new technology, said Lynn Reaser, chief economist at
NationsBank Private Client Group in Jacksonville, Florida.
Housing shows no signs of slowing, either. The National
Association of Home Builders said its housing market index was
unchanged at a record 78 in December, suggesting builders are
optimistic that housing will post another in a series of strong
years in 1999.
Fed in the Crosscurrents
That leaves an unusual number of crosscurrents for Federal
Reserve officials to discuss when they meet next Tuesday to
discuss U.S. interest rates.
''The lack of inflationary pressures provides the Fed with
all the room it needs to cut interest rates again at the first
sign of even a slight weakening in the economy,'' said Joel
Naroff, chief bank economist at First Union in Philadelphia.
.....................
Today's inflation report showed that energy prices, which
account for about a tenth of the CPI index, were unchanged during
November from October as a drop in gasoline and fuel oil costs
offset unexpected increases in natural gas and electricity.
Services Dominate
About 55 percent of the CPI covers prices consumers pay for
services, ranging from doctor visits to airline tickets. The
price of goods such as food and autos accounts for the rest of
the index.
Health care costs rose 0.2 percent and prescription drug
prices climbed 0.3 percent last month. The cost of medical care
is one area of concern for the inflation outlook. ''You've had a
pretty dramatic acceleration in the CPI for medical care prices
over the past year,'' noted Patrick Dimick, an economist at
Warburg Dillon Read in Greenwich, Connecticut.
Elsewhere, tobacco prices fell 1.1 percent, which could be
reversed this month because of the tobacco industry's agreement
to pay state governments $206 billion for health-care costs, to
be financed through higher cigarette prices.
The U.S. average retail price per pack could go from about
$2.07 to about $2.60 and the effect on the December CPI ''is
going to be between 0.1 and 0.3'' percentage point, said Patrick
Jackman, an economist at the Bureau of Labor Statistics, which
compiles the report.
Tame Inflation
Still, economists expect overall inflation to stay tame,
especially since U.S. consumers have become accustomed to waiting
for price declines before they make purchases. Wal-Mart Stores
Inc., Dayton Hudson Corp.'s Target and other discounters
attracted shoppers seeking bargains on brand-name household goods
and apparel over the past weekend, keeping U.S. retail sales on
track to rise at least 4 percent this holiday season.
Since retailers have tried to keep inventory costs in check,
their stockpiles are running lean. The inventory-to-sales ratio
for retailers excluding auto dealers fell to 1.39 months during
October, the lowest level since April 1981, according to the
Commerce Department. The ratio, which measures the time goods sit
at wholesalers, stood at 1.40 months in September.
The purchasing power of consumers is rising too, which means
demand should stay strong. Average weekly earnings for U.S.
workers rose 0.1 percent in November -- when adjusted to account
for inflation -- after increasing 0.5 percent in October.
Consumer spending, rising at a 5.4 percent annual rate
through the first three quarters of 1998, is a third higher than
last year's 3.4 percent increase. If that pace continues,
retailers will need to increase orders.
''Sales have been faster than expected for most of this
year, so inventories have struggled to keep pace,'' said Ian
Shepherdson, chief U.S. economist at High Frequency Economics
Ltd. in Valhalla, New York. ''This is good news for the economy,
because it suggest retailers will have to order more goods.''
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