US producer prices flat as industrial production and consumer sentiment rise

There was more good news on the US economy yesterday.

Continuing the recent signs of benign inflation, the Labor Department reported yesterday that the US producer price index (PPI) showed no change in June from the previous month. The index had fallen 0.6 percent in May and risen 0.6 percent in April. The core PPI -- foods and energy -- decreased 0.1 percent in June, following a 0.1 percent rise a month earlier. The year-on-year rise in total PPI was 3.6 percent, well below the 4.9 percent peak in March.

Also yesterday, the Federal Reserve reported that US June industrial production rose 0.9 percent, more than twice the expected 0.4 percent gain and the biggest gain since February 2004. Most of the gain came from a jump of 5.3 percent in the output of utilities as a result of warmer-than-usual temperatures. Manufacturing output rose 0.4 percent. Capacity utilization hit 80.0 percent, the highest since December 2000.

To add to the positive outlook, the Federal Reserve Bank of New York reported that its manufacturing index jumped to 23.9 in July, the highest since December while the Commerce Department reported that business inventories in May rose only 0.1 percent from April, reducing the headwind from excess inventories.

Positive consumer sentiment added to yesterday's good news. The University of Michigan's preliminary consumer sentiment survey for July came in above expectations at 96.5, the highest for 2005.

Based on yesterday's commentaries in the Global Economic Forum, Morgan Stanley economists are probably not surprised by the direction of the US economy. Stephen Roach on inflation:

Inflation appears to be down and out, but there are lingering fears of a comeback. Those fears are based on the closed-economy inflation models of yesteryear. In the timeworn jargon of the dismal science, the "Phillips curve" tradeoff between growth and inflation is still thought to be alive and well. These fears are overblown, in my view. If anything, the risks are skewed more toward another deflation scare rather than a worldwide acceleration of inflation. Financial markets are not aligned with those risks.

Richard Berner and Shital Patel on business conditions:

Business conditions improved again in early July, according to the Morgan Stanley Business Conditions Index (MSBCI), confirming other indicators pointing to rebounding growth. The index increased three points to 57%, and now stands 10 points above its April trough; this is the biggest three-month gain in the index since September 2003.

The US economy continues to give positive surprises. No wonder the S&P 500 rose to 1,227.92 yesterday, its highest close in four years.