Inflation moderates even as food prices soar. The Bureau of Labor Statistics reported that the Consumer Price Index for all Urban Consumers (CPI-U), used to measure price inflation, rose 0.2 percent in April (seasonally adjusted) and 3.9 percent since April 2007.  Core CPI, which excludes food and energy prices, inched up slightly by 0.1 percent in the month and 2.3 percent over the year, indicating that, for the time being, surging gasoline and food prices are not fueling price spikes on other goods.  This good news is tempered by the stand-alone growth in food prices, which rose 5.1 percent since April 2007, the highest such increase in 18 years.

Industrial production operating rate at its lowest level since Hurricane Katrina. A Federal Reserve survey of industrial production showed that output fell by 0.7 percent in April, the second such large drop in the first four months of 2008.  Though declining demand for automobiles was expected to push production lower, it only contributed to half the decline in overall output, suggesting that American consumers are cutting back more broadly on purchases.  Lower production has led in turn to a lower capacity utilization rate of 79.7 percent, which is the lowest operating rate since Hurricane Katrina shut down much of the Gulf Coast in 2005.

Single-family home starts drop to 1991 recession level.  The Census Bureau reported that new residential construction increased by 8.2 percent in April, a surprising uptick after last month’s 13.8 percent decline.  The increase was, however, largely driven by a 36 percent increase in apartment construction. In contrast, single-family home construction dropped another 1.7 percent to close at an annual rate of 692,000 starts per year, the lowest such rate since January 1991, in the midst of a nationwide recession. (See Chart)

Recent results from the University of Michigan Survey of consumer sentiment indicate that, from the vantage point of households, the economy is not performing well.  The value of the Consumer Sentiment Index for May fell to a 28-year low.  (See Snapshot) The May index value is over 30 percent lower than the average in 2007.

The Michigan researchers construct two other indices, both of which declined in April.  The Index of Current Conditions hit its lowest level since December 1980, and the Index of Consumer Expectations also declined.
Although the Michigan survey does not reveal why households are so gloomy, recent statistical releases provide a host of potential explanations.  April earnings data, released by the Bureau of Labor Statistics, showed that real average weekly earnings of private nonfarm production and nonsupervisory workers have declined one percent from a year ago.  Over the period money wages have been rising, but prices have risen more rapidly.

Moreover, prices for household necessities are rising more rapidly than overall price levels.  The consumer price index (CPI) for energy rose at a seasonally adjusted compound annual rate of 5.6 percent for the three months ending in April.  The CPI for food rose even faster at 6.3 percent (seasonally adjusted annual rate).  Over the same period the CPI-U, the price index for all urban consumers, rose at 2.3 percent. The more rapid increase in the prices of goods for which there are no good substitutes means that consumers have less disposable income available for other purchases.

Consumer views about the future are also likely to have been affected by developments in the housing market.  The most recently available data for the S&P/Case-Shiller 20-city home price index declined by nearly five percent in the first two months of 2008.  Given that the aggregate housing stock is worth about $20 trillion, the price decline means a loss in housing wealth of about $1 trillion over two months.

Housing price declines and slow sales of single family homes are also affecting the views of home builders.  The National Association of Home Builders/Well Fargo Housing Market Index (HMI) summarizes measures of current and expected single-family sales, as well as a measure of buyer traffic.  The index declined in May to a value of 19, close to the historic low set in December 2007.  The sentiments recorded in the HMI are consistent with the observable builder behavior.  Housing starts in April were at a seventeen year low.

Ben Bernanke, Federal Reserve chairman, remains cautious about likely developments in financial markets.  In his May 13 speech he noted that as a result of Fed efforts to provide liquidity, there have been recent improvements in financing markets.  He cited better functioning in the markets for Treasury repossessions and agency-issued mortgage back securities among others.  However, he also indicated that conditions in financial markets remain far from normal.  He pointed to indicators such as continuing strong bank demand for funds through the Temporary Auction Facility and interest rate spreads which reflect the unwillingness of banks to lend to each other.  The Fed clearly does not expect that financial market difficulties will be rapidly resolved.