Industrial production plunges
The index of industrial production declined 0.8 percent in May after falling 0.6 percent in April. This marked the eighth straight monthly decline. Production of consumer goods and business equipment fell by a larger magnitude than construction supplies. However, production of business equipment is on par with year ago levels, while consumer goods are down 2.2 percent from last May and construction supplies are 3 percent below year ago levels. The chart below shows the average pace of production in April and May relative to the first quarter average. It seems that the second quarter is shaping up to match the first in its weakness.

Among consumer goods, production of home electronics rose 1.3 percent in May on top of a 2.8 percent hike in April. This follows a cumulative drop of 12% in February and March, but perhaps is signaling the beginning of a turnaround. In contrast, appliances, carpet, and furniture production declined a cumulative 3.4 percent in April and May. This is likely the beginning of continued weakness if housing starts and home sales begin to cool off from the high levels of a year ago. Among nondurable goods manufacturers, production was uniformly down - by large magnitudes and covering several months. Business equipment production was slightly better, although still anemic.

Inflation fine, except for energy
The consumer price index jumped 0.4 percent in May, an acceleration from the lower gains of the previous two months. However, this can almost entirely be attributed to higher energy prices (+3.1 percent) in May. Excluding food and energy, the CPI inched up 0.1 percent, less than the past several months. Indeed, the chart below shows that the core CPI (excluding food and energy prices) is showing some mild signs of improvement in the past few months after peaking in January. Unfortunately for consumers, they can't "exclude" food and energy from their household budget. Consequently, higher prices for gasoline or natural gas or electricity can't be viewed as a statistical anomaly and does represent less money to spend on other goods and services.

Perhaps we will see better inflation news in the next few months. The producer price index inched up 0.1 percent in May, less than the 0.3 percent hike posted in April. Energy prices barely budged in this inflation measure and may suggest that more favorable news is on the horizon for consumers with respect to gasoline pump prices. Excluding food and energy prices, the PPI rose 0.2 percent in May, matching the April gain. This figure is slightly misleading in that tobacco product prices surged 4.9 percent in May after remaining unchanged in the previous two months. Excluding tobacco from the PPI reveals a 0.1 percent drop in the core PPI. This suggests that inflation news is friendly. Oddly enough, the year-over-year changes in the PPI are not showing any improvement in the past few months although the core PPI gains have been moderate on the whole.

Retail sales jump in May
Retail sales inched up 0.1 percent in May after gaining 1.4 percent in April. The up-down pattern isn't unusual in a period when economic activity is lackluster. Consumer disposable income is rising moderately, but consumers aren't gaining the same bang they got in the late 1990s from the rapidly accelerating stock market. The wealth effect allowed consumers to spend more than their income for a long period of time. We are now in a period where the wealth effect should be negative; that is, causing consumers to actually spend less than their actual earnings. Notice the anemic, albeit stable, trend in retail sales over the past six months.

Consumer sentiment is not worsening necessarily. The preliminary mid-month reading on June showed that the University of Michigan's consumer sentiment index dipped to 91.6 from 92 in May. On the whole, this reflects a relatively stable period since the beginning of the year. Retail sales aren't likely to be disastrous in the next several months, but neither will the series show stellar performance given that a greater number of layoffs are being announced these days. Even though the majority of consumers have jobs (the unemployment report stood at 4.4 percent in May), headlines causes uncertainty, and this hurts spending behavior.