Last week was a busy one for economic data. For the most part the news was good, especially when one looked under the surface. We started out the week with a rather perplexing Retail Sales Report. The headline number came in well below expectations at a rise of 0.4%. That was still much higher than the December increase of 0.1%, but the consensus was looking for a 0.8% increase.

The perplexing part was that once you strip out Auto sales, then we saw a rise of 0.7% rather than the 0.5% increase that was expected, and way up from the -0.2% in December. The numbers all the Auto companies put out a few weeks ago told a very different story, and in all likelihood, a more accurate one. I suspect that the retail sales numbers will be revised significantly next month.

Wednesday brought us the Industrial Production and Capacity Utilization numbers. The headline was very soft, at unchanged rather than the 0.6% rise that was expected. However, there was a very big upward revision to last month, with the rise now seen at 1.0% rather than the original 0.4%. That should put upward pressure on the upcoming revision to the fourth quarter GDP numbers.

The weakness was in the Utility sector, not in manufacturing. Factory output rose by 0.7%, and December was revised up to a 1.5% increase from 0.9%. Utility output plunged by 2.5% on top of a 2.4% drop in December. That says more about the mild weather than it does economic activity.

That can also be seen in the capacity utilization numbers. In January power plants were operating at just 74.6% of capacity, the lowest on record, breaking December’s record low. Given the high level of operational leverage at an electric utility, this is a ad omen for their first quarter earnings. I would avoid the group, especially the ones with poor Zacks Ranks like PG&E (PCG) and Dominion Resources (D). Overall I thought the Industrial Production report was a very strong one, despite the weak headline numbers.

We got two regional “mini ISM’s”, the Empire State Index and the Philly Fed Index. Both were up from last month, and better than expected. That was particularly true for the Empire State index which came in at 19.5, far above the 14.0 that was expected and last months 13.5. Clearly the manufacturing sector, at least in the Mid-Atlantic area, is on the mend.

We also got some good news on the housing front. The National Association of Homebuilders index rose to 29, its fifth straight increase and well above the expected level of 26, and up from 25 in December. It was 14 as recently as September. While that does not mean that conditions are good in the Homebuilding sector, as any reading below 50 means that more homebuilders see conditions as poor than good, but it is the least despondent they have been since 2007. Historically the index has been a pretty good leading indicator of housing starts.

Speaking of housing starts they rose to an annual rate of 699,000, much better than the 670,000 level that was expected. December was also revised sharply higher to a rate of 689,000 from 657,000. That too should help cause an upward revision to fourth quarter GDP, and is a good omen for first quarter GDP. A real recovery in the housing market is probably the biggest “upside risk” to the economy. If it happens, then economic growth in 2012 is likely to be much stronger than is currently priced into the markets. The operative word there though is “IF”.

We got another nice surprise on initial jobless claims, which dropped to 348,000 from 361,000 (revised up from 358,000). The consensus was looking for 365,000. The four week moving average fell to 365,250. That is its lowest level since May 2008. The average level since the start of 1980 is 386,049. We topped out in March of 2009 at 652,500.

While even 348,000 sounds like a lot of claims, I really isn’t. It is pretty rare to fall below the 300,000 level, which tends to happen only in economic boom conditions. The current level is a very good omen for the February jobs report. I suspect we will see even more jobs added this month than the 243,000 we gained in January.

We got two key readings on inflation, the PPI and the CPI. The headline numbers on both were lower than expected, butt he core numbers were higher. I think that barring a real meltdown over Europe, the higher core numbers, 0.4% for PPI and 0.2% for CPI have probably taken QE3 off the table. The Fed minutes out this week showed that the Fed is deeply divided over the issue, and the higher core readings, while not awful in and of them selves, will probably tip the scales against doing it.

All in all, a solid week on the economic data front, especially when you scratch below the surface.

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