Fed Funds Rate Raised to 4.25%

US retail sales increased 0.3% for the third straight month in November. The increase about matched Consensus expectations for a 0.4% rise and October's gain was upwardly revised. Less autos, retail sales fell 0.3% versus expectations for no change.

A 16.9% drop in pump prices weighed heavily on last month's sales tally and it fostered a 5.9% m/m drop in sales at gasoline service stations. Gas prices in December have stabilized w/w around $2.17 per gallon, down a dime from the November average.

Less gasoline, nonauto retail sales rose 0.5% (7.6% y/y) following a little revised 1.0% October gains. For the fourth straight month sales at building material & supply dealers ballooned, last month by 1.9% (14.5% y/y).

Discretionary spending continued firm and added marginally to strong October gains. Apparel store sales added 0.2% (7.3% y/y) to a 2.6% pop and general merchandise store sales rose 0.1% (6.7% y/y) on top of a strong 1.1% October increase.

A little less firm were sales at furniture & electronics stores which rose just 0.1% (6.6% y/y) following a 0.3% drop in October. Sales of nonstore retailers (internet & catalogue) also fell by 0.2% (10.3% y/y) after a 0.8% October increase.

The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

The Bureau of Labor Statistics reported that the job openings rate, from the Job Openings & Labor Turnover Survey (JOLTS), rose again in October suggesting a further firming of the US job market. The rate rose to 2.9% from an upwardly revised 2.8% in September and from 2.4% one year ago. The job openings rate is the number of job openings on the last business day of the month as a percent of total employment plus job openings.

The actual number of job openings rose 156,000 (21.0% y/y) to four million.

The job separations rate dropped sharply to 3.1% from an upwardly revised 3.6% in September and for the first time this year fell below the 2004 average of 3.2%. Total separations include quits, layoffs, discharges, and other separations as well as retirements. The total separations, or turnover, rate is the total number of separations during the month divided by employment.

The hires rate held steady at 3.5% versus an upwardly revised September level. The hires rate is the number of hires during the month divided by employment.

The survey dates only to December 2000 but has since followed the movement in nonfarm payrolls.

A description of the Jolts survey and the latest release from the U.S. Department of Labor is available here.

Total business inventories rose 0.3% in October following an unrevised 0.5% gain the prior month. Despite these increases, the ratio of inventories-to-sales held at the record low of 1.25 as business sales increased 0.8% (7.6% y/y).

Business' hesitancy to build inventory is evident from several aspects of the latest release. While the annual growth in business sales has slowed to 7.6% from 9.7% during all of 2004, the growth in inventories has nearly halved to 4.1% from 7.7% last year. And the following detail underscore that hesitancy.

Retail inventories rose just 0.1% and even that small addition was due to a 0.7% rise in motor vehicle inventories which followed large additions during the prior two months. Excluding autos, inventories fell 0.1% and the September increase was revised sharply lower. Clothing inventories managed a 0.3% (5.7% y/y) but general merchandise fell 0.1% (+6.2% y/y). Inventories of furniture fell by 0.3% (+5.8% y/y) for the fourth consecutive down month.

Wholesale inventories rose just 0.2%. During the last ten years there has been a 66% correlation between the y/y change in wholesale inventories and the change in imports of nonpetroleum goods.

Factory sector inventories jumped 0.6% led by a 3.7% surge at petroleum refineries.

The index of small business optimism from the National Federation of Independent Business (NFIB) fell 2.4% last month and reversed much of October's improvement.

The decline was due to fewer (11%) firms expecting the economy to improve. Plans for adding to employment fell to 13% from the high 17% of the last three months but the number of firms with job openings increased to the cycle's high of 24%. The percentage of firms planning to raise capital expenditures surged to 34%, the highest since March.

During the last ten years there has been a 70% correlation between the level of the NFIB index and the two quarter change in real GDP.

The percentage of firms planning to raise average selling prices rebounded to 33%, the highest level in over twenty years. The percentage of firms actually raising prices also rose. During the last ten years there has been a 60% correlation between the change in the producer price index and the level of the NFIB price index.

About 24 million businesses exist in the United States. Small business creates 80% of all new jobs in America.

The latest press release from the NFIB is available here.

The ZEW survey of institutional investors and analysts showed a 22.9 point increase in expectations for improvement in the German economy six months ahead. This was the second largest month-to-month increase recorded since the series began in January 1992. The largest increase, 31.5, occurred in July 1993. Relief that the much of the uncertainty arising out of the recent election has abated may have been part of the reason for the increased confidence. But, the strength in exports and increased business investment in the third quarter may also have played a role in the increased confidence. Aided by a weaker Euro--the Euro has declined some 13% since early this year--goods export growth in the third quarter rose to 5.2% compared with 1.0% and 1.8% increases in the second and first quarters of this year. Expenditures on business equipment rose 3.8% in the third quarter compared to increases of 0.6% in the second quarter and 1.6% in the first.

The respondents to the survey were somewhat less pessimistic about the current economic conditions. Pessimists outweighed optimists by 44.6% in December, down from 55.2% in November and 64.2% in December of a year ago. The continued dissatisfaction with current conditions may be due to the continued sluggishness in the consumer related areas of consumer spending and residential construction. The quarterly increases in consumer spending have been -0.27%, 0.18% and -0.03% in the first, second and third quarters of this year while the corresponding figures for residential construction have been -2.56%, 0.59% and 0.89%.

The ZEW survey also queries its respondents on current conditions and expectations for improvement in the next six months in the economy of the Euro Zone as a whole. Expectations for improvement in the economy six moths ahead in Germany and in the Euro Zone are show in the first chart. Over the past five years expectations for all of the Euro Zone, including Germany, have generally been greater than those for Germany alone. This year expectations for the German economy appear to be improving relative to the Euro Zone as a whole.

In terms of opinions on current conditions in the Euro Zone and Germany, shown in the second chart, the respondents to the ZEW survey are generally more pessimistic about the German economy than for the Euro Zone economy as a whole.