Fifty, anyone? Friday's consumer price index was viewed as a green light to the Federal Reserve to lower the overnight federal funds rate by 50 basis points when it meets on June 26 and 27.
While the headline CPI rose 0.4 percent in May, excluding food and energy the index posted a benign 0.1 percent increase, the smallest since December, even with an outsized increase of 0.5 percent in a huge component like shelter, which accounts for 30 percent of the CPI.
In case the Fed was looking for some encouragement from the market, the yield on the two-year Treasury note slipped decisively below 4 percent for the first time since the end-of-the-world scare in the fall of 1998. Financial futures markets are closing in on a 50 percent chance of another large cut.
The CEOs who have Fed Chief Alan Greenspan's ear aren't exactly whispering sweet nothings. In the past few days, technology heavyweights Nokia Oyj, Nortel Networks Corp and JDS Uniphase Corp have all come out with downbeat outlooks for sales and profits.
Their tales of woe were summarized Friday in a report on industrial production, which fell 0.8 percent in May. The output from mines and utilities declined in addition to a 0.7 percent drop in manufacturing, which accounts for 85 percent of total industry output.
For manufacturing, it was eighth consecutive monthly decline, putting the level of output 4.5 percent below that in September.
Even in 1990-1991 recession, manufacturing output didn't fall so consistently without a bounce. The total decline in manufacturing output from August 1990 through March 1991 was 5 percent.
A blinding number of minus signs preceded manufacturing categories last month. In fact, the only major groups to show an increase were motor vehicles and lumber.
Output in a category the Fed designates as "selected high-technology industries," which includes computers, communications equipment and semi-conductors, fell 1.2 percent last month, the fifth consecutive monthly decline, all of which exceeded 1 percent. Year-over-year, high-tech output has plummeted from almost 60 percent in September to 12 percent in May.
No wonder the factory operating rate for this group of key industries plunged to 70.3, the lowest in 25 years. The Fed is hoping the degree of weakness in the real economy will take the edge off inflation.
To be sure, there is no inflation in goods prices. Core commodities prices (excluding food and energy) fell 0.4 percent in May, 1.9 percent annualized in the three months ended May, and 0.8 percent in the last 12 months. It's those pesky services, which make up 58 percent of the CPI, where the price pressures are. Like everything else, services prices look much better without energy. Services excluding energy rose 0.3 percent in May, 3.7 percent annualized in the last three months and 4 percent in the last 12.
If there is good news, it's that the three-month trend is below the 12-month trend. But with 30 percent of the CPI -- shelter costs -- rising 0.5 percent in May, it will take consistent declines in the prices of apparel (down 0.9 percent in May), tobacco (down 1.3 percent), new vehicles (down 0.1 percent) and computers (down 4.1 percent) to offset rising housing costs.
Shelter costs rose 4.8 percent annualized in the last three months and 4.6 percent in the past year. Only recently has the housing market begun to emit a fainter heartbeat. Given the one-year lag between a broad measure of home prices and the shelter component of the CPI, according to Barclays' Capital Group economist Henry Willmore, this may not be the end of the bad inflation news.
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