Restocked Shelves

Stocks finished the week relatively flat as gold weakened and the US dollar hit its highest level in two months on stronger-than-expected economic data.

Even after an anemic Black Friday, retail sales were surprisingly brisk in November. The Commerce Dept reported that sales rose 1.3 percent last month, an increase that extended across all categories except furniture and clothing. And unlike in previous months, Cash for Clunkers made almost no contribution; excluding autos, sales were still up 1.2 percent amid steep discounting.

Businesses appear to have anticipated this improvement, as both businesses and wholesalers grew inventories. After 13 consecutive months of decline wholesalers, which act as middlemen between retailers and manufacturers, grew stockpiles by 0.3 percent. Accordingly, the inventory-to-sales ratio fell to 1.16 months of supply. Business inventories also ticked up for the first time in more than a year, growing 0.2 percent to 1.3 months’ worth of inventory.

That bodes well for the fourth quarter’s gross domestic product (GDP) reading and provides support for the thesis that the mother of all restocking cycles will revive the US economy in the coming quarters. Consumers are once again spending and confidence is on the rise, a combination that helps to disrupt the negative feedback loop and should put people back to work throughout the value chain.

In light of restocking and other positive data, last week’s spike in unemployment claims appears reflect seasonal issues rather than any newfound business weakness. Initial claims jumped to 474,000 from 457,000, likely as a result of lower volume around the Thanksgiving holiday and seasonal layoffs in construction. On the other hand, continuing claims continued their decline, falling to 5.157 million from 5.465 million.

It will be interesting to see if these sales gains carry over into December; the University of Michigan reported a strong rebound in consumer sentiment, though the index still remains in recessionary territory. December’s preliminary reading bounced to 73.4 from 67.4, far higher than the 68.8 that had been forecast. Although this improvement wasn’t enough to break out of the range associated with past recessions, the data does point to the consumer finding equilibrium.

And that’s likely being helped along by the consumer credit situation which, while still contracting, appears to be moderating. In October, consumer credit declined a net $3.5 billion, or 1.7 percent, as opposed to the anticipated $9.4 billion contraction. Revolving debt fell $6.95 billion (9.5 percent) while non-revolving debt such as home, auto, and student loans increased $3.44 billion (2.6 percent). Although the plastic might not be available to finance lifestyles, credit is available for big ticket purchases.

A raft of data is due out next week, including industrial production and capacity utilization numbers on Tuesday. That data will reflect November activity and is widely expected to improve moderately. Both the consumer and producer price indexes are due out and are likely to show that inflationary pressures remain subdued. The Federal Open Market Committee will also announce its rate decision on Wednesday. The current target rate isn’t expected to change.