Tag Archives: Aggregate Demand

Mtg Purchase Applications

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Obvious that the end of the $8,000 first time home buyer credit caused a spike that has been more than reversed, much like November.

The question is how much that pull back, along with the euro and China issues, will slow what has been a moderately growing US economy.

With demand leakages like pension fund contributions and income compounding in pension funds and other corporate reserves, aggregate demand can only be sustained by the private sector or the public sector spending more than its income.

And right now the drivers of private sector debt- housing and cars- don’t show signs of the increases necessary to close our output gap.

That leaves the public sector.

For the current size of govt, we remain grossly over taxed by a govt that thinks its run out of money and is now dependent on the confidence of investors to fund itself.

Note, for example, the expired unemployment benefits mean a reduction in aggregate demand which in fact works against employment.

And this is with a Democratic majority.

As long as the ‘deadly innocent fraud’ that to be able to spend dollars the US Govt needs to tax or borrow is taken as a given, it seems unlikely that pro growth policy will be implemented and unlikely growth will be sufficient to materially close the output gap any time soon.

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Job sector trends

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Right, if you look at unemployment and the output gap in general as a % of the non government sectors
The drop is probably close to double the headline numbers.

This was a serious collapse of aggregate demand left to run it’s own course and reversed around year end only
due to the automatic stabilizers doing their thing the very ugly way.

A proactive fiscal adjustment — payroll tax holiday, per capita distribution to the states, etc. could have averted most of the economic losses that were allowed to happen.


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US – State Tax Reveues Stuggling

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Preliminary data for Jan – Mar quarter shows sales tax at -0.1% YY, first decline since 2002 Q1. 21 states out of 36 reporting so far saw declines. Inflation adjusted sales tax declined in at least 27 states. Income tax was +4.7% YY thus no notable deterioration yet.

Here are the sales tax data from largest states:

Califonia -0.9
Texas +6.7
NY +4.2
Florida -6.0
Illinois +0.1
Penn -1.0
Ohio +0.5
Michigan -0.7
Georgia -3.0
North Carolina -7.6

Separately, Tennessee says sales tax dropped 5.5% in April.

The key to aggregate demand is net state spending.

If taxes fall but spending is sustained, that’s a demand add, for example.

Gross spending/taxing also has a multiplier greater than 1.

This includes states ‘borrowing to spend’ for ‘investment’ accounts.

GDP tables showed that states have cut back, reducing the size of their add to aggregate demand.

But Federal government has more than made up for it.


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Wed am recap

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Mainstream economics says:

Get inflation right and that ‘automatically’ optimizes long-term growth and employment.

Adding to demand with a negative supply shock turns a ‘relative value story’ into an ‘inflation story.’

The ECB is following mainstream theory, while the Fed is not.

why?

The Fed sees looming systemic, deflationary tail risk at the door. At least up to now.

The panic of 1907 and the early 1930s deflationary collapse (both previous examples given by the Fed) were gold standard events.

With a gold standard (and/or other fixed rate regimes) there are direct supply side constraints on the reserve currency. Interest rates are market determined, and during a credit crunch rates spike higher ‘automatically.’ Even the treasury must fund itself and faces the same supply side constraints, thereby limiting fiscal responses. This continues in today’s fixed fx currencies.

With floating fx/non-convertible currency there are inherent no direct supply side constraints on bank lending, deposit creation, and credit in general. Any constraints are on the demand side, including financial capital where constraints are also on the demand side. The CB necessarily directly sets rates, not market forces, and government spending is not constrained by taxing, borrowing, etc., hence fiscal packages are subject only to political choice.

Today’s risks are much the same as previous financial crisis type risks like 1987 and 1998, where the government and its agencies have the open option of ‘writing the check’ as desired, with inflation the price to pay, not government solvency as with fixed fx regimes.

Just like the 1970s, the Saudis are acting the swing producer and setting price and letting quantity they pump adjust. This is also necessarily the case when one is single supplier at the margin with excess capacity. The alternative of pumping flat out and hitting bids in the spot market is not a functional option for any monopolist. Only price setting is.

Russia is also a monopoly supplier at the margin and probably is also acting as a swing producer. So crude prices go to where the higher of the two set them.

Mainstream theory has not yet publicly addressed this kind of negative supply shock.

One option is to match the domestic inflation rates to the price hikes to try to avoid declining real terms of trade.

This is both politically impossible, and it can quickly lead to accelerating inflation.

We have two choices, neither particularly attractive:

  1. Watch our real terms of trade continue to collapse as crude prices are continuously hiked.
  2. Try to inflate to moderate the drop in real terms of trade.

Ironically, we will chose the later as we did in the 1970s because inflation is not a function of interest rates in the direction CBs subscribe to.

Increasing nominal rates increases inflation via the cost and demand channels.

Costs of holding inventory and investment rise with rate hikes.

Governments are net payers of interest to the non-government sectors; so, rate hikes also increase government spending on interest to support incomes in the non-government sectors.

Good luck to us!

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Re: Bernanke

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(email)

On 11 Jan 2008 11:17:34 +0000, Prof. P. Arestis wrote:
>   Dear Warren,
>
>   Many thanks. Some good comments below.
>
>   The paragraph that I think is of some importance is this:
>
> >  The Committee will, of course, be carefully evaluating incoming
> >  information bearing on the economic outlook. Based on that evaluation,
> >  and consistent with our dual mandate, we stand ready to take
> >  substantive additional action as needed to support growth and to
> >  provide adequate insurance against downside risks.
>
>   If I am not wrong this is the first time for Bernanke that the word
>   inflation does not appear explicitly in his relevant statement. But also
>   there is no mention of anything relevant that might capture their motto
>   that winning the battle against inflation is both necessary and sufficient
>   for their dual mandate.
>
>   Are the economic beliefs of BB changing, I wonder? I rather doubt it but
>   see what you think.

Dear Philip,

I see this is all part of the Bernanke conumdrum.

Implied is that their forecasts call for falling inflation and well anchored expectations, which can only mean continued modest wage increases.

They believe inflation expectations operate through two channels-accelerated purchases and wage demands.

Their forecasts use futures prices of non perishable commodities including food and energy. They don’t seem to realize the
‘backwardation’ term structure of futures prices (spot prices higher than forward prices) is how futures markets express shortages.

Instead, the Fed models use the futures prices as forecasts of where prices will be in the future.

So a term structure for the primary components of CPI that is screaming ‘shortage’ is being read for purposes of monetary policy as a deflation forecast.

Bernanke also fears convertible currency/fixed fx implosions which are far more severe than non convertible currency/floating fx slumps. Even in Japan, for example, there was never a credit supply side constraint – credit worthy borrowers were always able to borrow (and at very low rates) in spite of a near total systemic bank failure. And the payments system continued to function. Contrast that with the collapse in Argentina, Russia, Mexico, and the US in the 30’s which were under fixed fx and gold standard regimes.

It’s like someone with a diesel engine worrying about the fuel blowing up. It can’t. Gasoline explodes, diesel doesn’t. But someone who’s studied automobile explosions when fuel tanks ruptured in collisions, and doesn’t understand the fundamental difference, might be unduly worried about an explosion with his diesel car.

More losses today, but none that directly diminish aggregate demand or alter the supply side availability of credit.

And while the world does seem to be slowing down some, as expected, the call on Saudi oil continues at about 9 million bpd,
so the twin themes of moderating demand and rising food/fuel/import prices remains.

I also expect core CPI to continue to slowly rise for an extended period of time even if food/fuel prices stay at current levels as
these are passed through via the cost structure with a lag.

All the best,

Warren

>
>  Best wishes,
>
>  Philip

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Crisis may make 1929 look a ‘walk in the park’

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Crisis may make 1929 look a ‘walk in the park’

Telegraph
by Ambrose Evans-Pritchard

As central banks continue to splash their cash over the system, so far to little effect, Ambrose Evans-Pritchard argues that things risk spiralling out of their control

Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas.
Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.

It’s about price, not quantity (net funds are not altered), and the CB actions have helped set ‘policy rates’ at desired levels.

That is all the CBs can do, apart from altering the absolute level of rates, which, by their own research, does little or nothing and with considerable lags.

Not to say changing rates isn’t disruptive as it shifts nominal income/wealth between borrowers and savers of all sorts.

As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world’s central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.

“Liquidity doesn’t do anything in this situation,” says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.

The last major, international fixed exchange rate/gold standard implosion. Other since – ERM, Mexico, Russia, Argentina – have been ‘contained’ to the fixed fx regions.

“It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue,” she adds.

The critical issue at the macro policy level is what it is all doing to the aggregate demand that sustains output, employment, and growth. So far so good on that front, but it remains vulnerable, especially given the state of knowledge of macro economics and fiscal/monetary policy around the globe.

Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor – the interbank rates used to price contracts and Club Med mortgages – are stuck at 80 basis points even after the latest blitz. The monetary screw has tightened by default.

The CB can readily peg Fed Funds vs. LIBOR at any spread they wish to target.

York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster.

Seems they pretty much did before year end. Spreads are narrower now and presumably at CB targets.

“The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are
allowing the money markets to dictate policy. We are long past worrying about moral hazard,” he says.

They have allowed ‘markets’ to dictate as the entire FOMC and others have revealed a troubling lack of monetary operations and reserve accounting.

“They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don’t think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park,” he adds.

Hard to do with floating exchange rates, but not impossible if they try hard enough!

The Bank of England knows the risk. Markets director Paul Tucker says the crisis has moved beyond the collapse of mortgage securities, and is now eating into the bedrock of banking capital. “We must try to avoid the vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand feed back on each other,” he says.

Seems a lack of understanding of the ‘suppy side’ of money/credit is pervasive and gives rise to all kinds of ‘uncertainties’ (AKA – fears, as in being scared to an extreme).

New York’s Federal Reserve chief Tim Geithner echoed the words, warning of an “adverse self-reinforcing dynamic”, banker-speak for a downward spiral. The Fed has broken decades of practice by inviting all US depositary banks to its lending window, bringing dodgy mortgage securities as collateral.

Banks can only own what the government puts on their ‘legal list’, and banks can issue government insured deposits, which is government funding, in order to fund government approved assets.

Functionally, there is no difference between issuing government insured deposits to fund their legal assets and using the discount window to do the same. The only difference may be the price of the funds, and the fed controls that as a matter of policy.

Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails.

Section 13 (3) allows the Fed to take emergency action when banks become “unwilling or very reluctant to provide credit”. A vote by five governors can – in “exigent circumstances” – authorise the bank to lend money to anybody, and take upon itself the credit risk. This clause has not been evoked since the Slump.

The government already does this. They already determine legal bank assets, capital requirements, and via various government agencies and association advance government guaranteed loans of all types.

This is business as usual – all presumably for public purpose.

Get over it!!!

Yet still the central banks shrink from seriously grasping the rate-cut nettle. Understandably so. They are caught between the Scylla of the debt crunch and the Charybdis of inflation. It is not yet certain which is the more powerful force.

Yes, as they cling to the belief that ‘inflation’ is a ‘strong’ function of interest rates, while it is an oil monopolist or two and a government induced and supported link from crude to food via biofuels that are driving up CPI and inflation in general.

America’s headline CPI screamed to 4.3 per cent in November. This may be a rogue figure, the tail effects of an oil, commodity, and food price spike. If so, the Fed missed its chance months ago to prepare the markets for such a case. It is now stymied.

CPI might also be headed higher if crude continues its advance.

This has eerie echoes of Japan in late-1990, when inflation rose to 4 per cent on a mini price-surge across Asia. As the Bank of Japan fretted about an inflation scare, the country’s financial system tipped into the abyss.

As I recall, it was a tax hike that hurt GDP.

Yes, the world economies are vulnerable to a drop in GDP growth, but the financial press seems to have the reasoning totally confused.

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Italian budget deficit down towards 2%

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Falling deficits in general in the Eurozone due to the growth rate of GDP combined and the countercyclical tax structure.

Aggregate demand from non government credit expansion (and some from exports) is supporting GDP as support from government deficit spending wanes. This can go on for quite a while as consumer leverage still has a lot of upside potential. However, it will self-destruct if allowed to continue long enough. And, as in the US, net exports have the potential to sustain growth in the medium term as well, though this is hard to fathom without a fall in the Euro.

I need to do more work on this as there are a lot of moving parts over there, including prospective members targeting their currencies, building Euro reserves (public and private), and tightening their fiscal balances. Additionally, portfolios have been rebalancing toward the Euro.

Overall, however, we enter 2008 with tightening fiscal balances in most countries. This will serve to keep a lid on demand and output, while rising food/energy will keep upward pressure on prices.

Italy’s 2007 public deficit about 2 pct of GDP

Prodi 27 Dec 2007 06:39 AM ET
Thomson Financial

Italy’s public deficit will be about 2 pct of GDP, compared with a government forecast of 2.5 pct, said prime minister Romano Prodi in his year-end address.

“We will close the year with a lower deficit, it will be around 2 pct, a figure below any forecast,” Prodi said.

philip.webster@thomson.com pw/ejb COPYRIGHT Copyright Thomson
Financial News Limited 2007. All rights reserved.

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Strong gdp and high credit losses

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CNBC just had a session on trying to reconcile high gdp with large credit losses. Seems they are now seeing the consumer clipping along at a +2.8% pace for Q4. No need to rehash my ongoing position that most if not all the losses announced in the last 6 months would have little or no effect on aggregate demand. Credit losses hurt demand when the result is a drop in spending. And yes, that happened big time when the subprime crisis took the bid away from would be subprime buyers who no longer qualified to buy a house. That probably took 1% away from gdp, and the subsequent increase in
exports kept gdp pretty much where it was. But that story has been behind us for over a year.

The Fed is not in a good place. They should now know that the TAF operation should have been done in August to keep libor priced where they wanted it. They should know by now losses per se don’t alter aggregate demand, but only rearrange financial assets. The should know the fall off in subprime buyers was offset by exports.

The problem was the FOMC- as demonstrated by their speeches and actions- did not have an adequate working understanding of monetary operations and reserve accounting back in August, and by limiting the current TAFs to $20 billion it seems they still don’t even understand that it’s about price, and not quantity. Too many members of the FOMC
are mostly likely in a fixed exchange rate paradigm, with its fix exchange rate/gold standard fractional reserve banking system that drove us into the great depression. With fixed exchange rates it’s a ‘loanable funds’ world. Banks are ‘reserve constrained.’ Reserves and consequently ‘money supply’ are issues. Government solvency is an issue.

With today’s floating exchange rate regime none of that is applicable. The causation is ‘loans create deposits AND reserves,’ and bank capital is endogenous. There are no ‘imbalances’ as all current conditions are ‘priced’ in the fx market, including ANY sized trade gap, budget deficit, or rate of inflation.

The recession risk today is from a lack of effective demand. There are lots of ways this can happen- sudden drop in govt spending, sudden tax increase, consumers change ‘savings desires’ and cut back spending, sudden drop in exports, etc.- and in any case the govt can instantly fill in the gap with net spending to sustain demand at any level it desires. Yes, there will be inflation consequences, distribution consequences, but no govt. solvency consequences.

So yes, there is always the possibility of a recession. And domestic demand (without exports) has been moderating as the falling govt budget acts to reduce aggregate demand. But the rearranging of financial assets in this ‘great repricing of risk’ doesn’t necessarily reduce aggregate demand.

Meanwhile, the Saudis, as swing producer, keep raising the price of crude, and so far with no fall off in the demand for their crude at current prices, so they are incented to keep right on hiking. And they may even recognize that by spending their new found revenues on real goods and services (note the new mid east infrastructure projects in progress) they keep the world economy afloat and can keep hiking prices indefinitely.

And food is linked to fuel via biofuels, and as we continue to burn up every larger chunks of our food supply for fuel prices will keep rising.

The $US is probably stable to firm at current levels vs the non commodity currencies, as portfolio shifts have run their course, and these shifts have driven the $ down to levels where there are ‘real buyers’ as evidenced by rapidly growing exports.

Back to the Fed – they have cut 100 bp into the triple negative supply shock of food, crude, and the $/imported prices, due to blind fear of ‘market functioning’ that turned out to need nothing more than an open market operation with expanded acceptable bank collateral (the TAF program). If they had done that immediately (they had more than one outsider and insider recommend it) and fed funds/libor spreads and other ‘financial conditions’ moderated, would they have cut?

There has been no sign of ‘spillover’ into gdp from the great repricing of risk, food and crude have driven their various inflation measures to very uncomfortable levels,and they now believe they have ‘cooked in’ 100 bp of inflationary easing into the economy that works with about a one year lag.

Merry Christmas!

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The Trillion Dollar Day

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The Trillion Dollar Day

Yesterday, $1.048 trillion dollars was printed out of thin air, which gave the globe its first Trillion Dollar Day.

Everyday, all government spending is ‘printed out of thin air’, and all payments to the government ‘vanish into thin air’.

However, there were no net payments yesterday for all practical purposes.

$506 bb was injected by the ECB into European Banks,

The uninformed language continues with ‘injected’ implying net funds ‘forced in’ somehow.

All that happened was the ECB offered funds at a lower interest rate to replace funds available from the ECB at higher interest rates. This has no effect on aggregate demand.

$518 bb was earmarked as an addon to the USA federal spending for 2008

Federal deficit spending does increase net financial assets of the ‘non government’ sectors. That is more properly called ‘injecting’ funds, as government exchanges credit balances for real goods and services (buy things), thereby adding to aggregate demand.

plus, $24 bb was taken by banks from other central banks to shore up reserves.

Not what happened. It was all about substituting one maturity for another.

Most importantly, 3 month Libor and Euro Dollar rates declined by only 15 – 20 basis points. The markets expected these rates to decline more as a sign of greater liquidity. The European and USA markets sold off over night and this morning in reaction to stubbornly high short-term rates.

When the CB’s fully understand their own reserve accounting and monetary operations, they will offer unlimited funds at or just over their target rates and maturities and also have a bid for funds at or just under their target.

An anonymous person from the ECB told Bloomberg this morning that the $518 bb was the single greatest injection of emergency lending in central bank history

Probably. Interesting thing to remember for trivial pursuits.

and that it was a climatic effort to free up inter-bank lending.

Should have been done long ago. CB’s main job as single supplier of net reserves is setting rates.

They also said it was all that they could do (for now).

It’s not all that they can do. Operationally, it’s simply debits and credits, for the most part totally offsetting with no net funds involved, not that it matters for the ECB anyway.

Here is my take on ECB efforts as I have discussed with members of our firm. Some bank(s) and/or investment bank(s) most likely have sustained huge market to market losses that they must bring onto their balance sheets soon, which are causing them and others who fear losses from counter parties in our $500 trillion plus derivatives market. My suspicion is that these losses include derivative losses that are not directly related to subprime.

OK. Point?

I also think that the FED and Central Banks have suspected the above since August 2007, which caused them to reverse course from fighting inflation to supply liquidity to save the banking and financial system.

Seems to be the mainstream view right now?

I also do not have much faith in central banks and government authorities ability to manage a widespread financial crisis because THEY created this crisis with their lose money and lax regulatory practices that have been rampant since 2002.

Point?

There is also evidence that USA government spending and deficits are much larger than actually reported since 2002. I have found reports from numerous ex-GOA officials and current GOA staff that have come clean with our BUDGET. Former government officials are now reporting that TSY SEC O’Neil was fired because he wanted to right the ship at GOA and report true numbers in his reports to Congress and the American public.

If they were larger than reporter and added more aggregate demand than appears on the surface, they are responsible for sustaining growth and employment.

Below is a take on this from John Williams. John also publishes the CPI using pre-1982 methods that show annualized CPI running 3-4% higher than reported under current methods.

I recall that debate and the results seemed very reasonable at the time. Can’t remember all the details now.

Here are adjusted Budget numbers for 2006-2007.

The results summarized in the following table show that the GAAP-based deficit, including the annual change in the net present value of unfunded liabilities for Social Security and Medicare narrowed to $1.2 trillion in 2007 from $4.6 trillion in 2006. The reported reduction in the deficit, however, was due to a one-time legislative-related accounting change in Medicare Part B that likely will be reversed, and, in any event, needs to be viewed on a consistent year-to-year accounting basis.

On a consistent basis, year-to-year, I estimate the 2007 deficit at $5.6 trillion, or worse, based on the government’s explanation of the process and cost estimates.

What matters from the macro level is the fiscal balance that adds/subtracts from the current year aggregate demand. This was learned the hard way in 1937 when, if I recall correctly, tax revenue from the new social security program was put in a trust fund and not counted as federal revenue for purposes of reporting fiscal balance and funds available for federal spending. The result was a fiscal shock/drop in demand that upped unemployment to 19% after having come down close to 10%.

From Note 22 of the financial statements, under “SMI Part B Physician Update Factor:”

“The projected Part B expenditure growth reflected in the accompanying 2007 Statement of Social Insurance is significantly reduced as a result of the structure of physician payment updates under current law. In the absence of legislation, this structure would result in multiple years of significant reductions in physician payments, totaling an estimated 41 percent over the next 9 years. Reductions of this magnitude are not feasible and are very unlikely to occur fully in practice. For example, Congress has overridden scheduled negative updates for each of the last 5 years in practice. However, since these reductions are required in the future under the current-law payment system, they are reflected in the accompanying 2007 State of Social Insurance as required under GAAP. Consequently, the projected actuarial present values of Part B expenditure shown in the accompanying 2007 Statement of Social Insurance is likely understated (my emphasis).”

Since this was handled differently in last year’s accounting, the change reduced the reported relative deficit. The difference would be $4.4 trillion, per the government, if physician payment updates were set at zero. I used that estimate, tentatively, for the estimates of consistent year-to-year reporting, but such likely will be updated in the full analysis that follows in the December SGS.

With Social Security and Medicare liabilities ignored, the GAAP deficits for 2007 and 2006 were $275.5 billion and $449.5 billion, respectively. Those numbers contrast with the otherwise formal and accounting-gimmicked cash-based deficits of $168.8 billion (2007) and $248.2 billion (2006).

Yes, net government spending may increase over time and may lead to higher rates of reported inflation, but solvency is not the issue.

These ‘deficit terrorists’ totally miss the point; fore, if they did ‘get it’ they would be doing the work and projecting future inflation rates, not just deficit levels.

Furthermore, they ignore the demand drains, like pension fund contributions, IRA’s, insurance reserves, corporate reserves, etc. that also grow geometrically and help ‘explain’ how government can deficit spend as much as it does without excess demand driving nominal growth to hyper inflationary levels.

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8:30 Numbers

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Consensus was high enough, let’s see how tomorrow turns out.

Also retail sales up a lot more than just energy prices, and claims down.

Still no sign yet of aggregate demand breaking down

Lehman earnings higher than estimates

November Inflation Surged; Retail Sales Also Strong

Inflation at the wholesale level was stronger than expected in November, thanks to higher gasoline prices, but retail sales also exceeded expectations as holiday shoppers coped with higher energy costs and the fallout from the housing slump.

U.S. producer prices surged at a 34-year high rate of 3.2 percent in November on a record rise in gasoline prices, the Labor Department said.

Excluding food and energy prices, the producer price index rose an unexpectedly large 0.4 percent, the heftiest gain since February, the report showed. When cars and light trucks also were stripped out, core producer prices rose 0.1 percent.

Autos had been lagging if I recall correctly, so was this overdue?

The rise in prices paid at the farm and factory gate was the largest since August 1973 and was well ahead of analysts’ expectations of a 1.5 percent gain. Analysts polled by Reuters had forecast core prices to rise 0.2 percent.

The 7.2 percent increase in producer prices from November 2006 was the largest 12-month gain since November 1981.

Gasoline prices rose 34.8 percent in the month, eclipsing the previous record gain of 28.8 percent in April 1999. Prices for all energy goods also rose by a record 14.1 percent, surpassing the previous high of 13.4 percent recorded in January 1990.

Sales at U.S. retailers posted a much stronger-than-expected 1.2 percent rise in November, government data showed as holiday shoppers coped with high energy costs and the fallout from a housing slump.

Excluding autos, retail sales gained 1.8 percent, the Commerce Department said.

Surprising on the upside.

Economists polled by Reuters forecast retail sales to rise 0.6 percent while sales ex autos were also projected to increase by 0.6 percent.

However, part of the increase was fueled by mounting energy prices, with gasoline sales spurting 6.8 percent higher in November, which was the largest monthly gain since September 2005 in the wake of Hurricane Katrina.

Still, sales excluding gasoline and autos gained 1.1 percent in November after growing just 0.1 percent in the previous month.

First-time claims for U.S. unemployment benefits eased by a slightly more-than-expected 7,000 last week, a Labor Department report showed.

New applications for state unemployment insurance benefits fell to a seasonally adjusted 333,000 in the week ended Dec. 8 from an upwardly revised 340,000 the week before. Analysts polled by Reuters were expecting claims to ease to 335,000 from the previously reported 338,000.

This means the fed still sees no slack in the labor markets.

The four-week moving average of new claims, which smooths out week-to-week fluctuations, fell slightly to 338,750 from a revised 340,750 the prior week.

The number of people continuing to receive jobless benefits after an initial week of aid rose to 2.64 million in the week ended Dec. 1, the most recent week for which statistics are available. Analysts had forecast claims would hold steady at 2.60 million.

The four-week moving average of continued claims rose to 2.61 million, the highest level since the week ended Jan. 7, 2006.

Not good, but not anywhere near bad enough to offset the other numbers reported.

Yesterdays is up 0.9% export number adding to US income and aggregate demand supporting retail sales as well.

Inflation per se is good for nominal equity prices, while the fed fighting inflation with higher rates hurts valuations.

A perceived stronger than expected economy and diminished odds of future rate cuts also likely to shift portfolio allocations back toward the $.

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