Economic Outlook 15th Jan 2008

Better-than-anticipated earnings news from IBM got equities off to a strong
start today. Optimism that the Fed will not let inflation fears keep it from
easing added fuel to the stock rally. Treasuries were mixed and little changed,
while the dollar took another step lower versus the euro and the yen.

Retail Sales and sales ex-autos for December will be released at 8:30
(Forecast +0.2%/+0.2%, Consensus unch/-0.1%). Retail sales surprised to the
upside in November, jumping 1.2% overall and 1.8% excluding autos. We estimate
the gains in December were much more modest, with the pace of holiday spending
petering out as the season progressed. We put December retail sales up 0.2%
both with and without motor vehicles. Gasoline sales are not likely to be a
large factor; we see the same 0.2% gain when gasoline is excluded.

The December Producer Price Index and core PPI are also due out at 8:30
(Forecast +0.1%/+0.1%, Consensus +0.2%/+0.2%). The December PPI should look
nothing like November's, when the index posted an energy-related rise of 3.2%.
Wholesale energy prices, which surged by 14.1% in November, probably edged up
only 0.2% last month. We put the headline December PPI at +0.1%. Excluding
food and energy, the core PPI should also be contained, rising an estimated 0.
1% in December after November's 0.4% gain. This would leave the core PPI
unchanged at +2.0% YoY through December.

January's Empire State Manufacturing Survey is also scheduled for 8:30
(Forecast +7.0, Consensus +10.0). This survey of manufacturers from the New
York region fell to 10.3 in December after posting strong readings above 25 in
five of the previous six months. Its average for all of 2007 was +17.1. For
January, we look for a further deterioration in the index to a nine-month low
of +7.0.

Business Inventories for November are due out at 10:00 (Forecast +0.4%,
Consensus +0.4%). Factory inventories jumped 0.8% in November, and we estimate
wholesale inventories rose 0.4%. We put retail inventories up 0.2% for the
month. These estimates leave us with an expected increase of 0.4% for total
business inventories in November. Looking forward, slowing inventory
accumulation is expected to subtract from GDP growth throughout the first half
of 2008.