Category Archives: Producer Price Index

Economic Indicators, Producer Price Index

November Wholesale Prices

KEY DATA: PPI: -0.2%; Goods: -0.7%; Energy: -3.1%; Services: +0.1

IN A NUTSHELL:   “With business costs well contained and consumer confidence rising, maybe even the Fed members will start feeling good about the economy.”

WHAT IT MEANS:  What am I missing?  I keep looking at my forecast for 2015 and I am well above most others.  Yet the recent data seem to point to an economy that is clearly accelerating and is being pushed forward by falling energy costs and improved consumer confidence.  On the cost side, wholesale prices fell in November, but that should shock absolutely no one.  We know that oil prices are slip, sliding away, so the headline decline was expected.  But even excluding energy, producer costs went nowhere.  Indeed, goods prices excluding energy were down a touch as food price increases eased up.  They had been soaring and that was offsetting some of the decline in oil.  If you look through the report, there were few goods categories where prices are rising.  The one place you can find it is in capital equipment.  I actually think that is just fine as it signals growing investment activity.  As for producer services, they continue to increase at a moderate pace.  Over the year, most wholesale prices are up between 1.5% and 2%, which is hardly threatening since the path from producer costs to consumer prices is not very direct.

There was some really good news on the consumer front.  The Thompson Reuters/University of Michigan’s early reading of December consumer sentiment was released and it looks like confidence is soaring.  The index hit its highest level in nearly eight years with expectations that growth would improve in the future leading the way.  This report reinforces the Bloomberg Consumer Comfort Index numbers that indicated that confidence has reached a seven-year high.

MARKETS AND FED POLICY IMPLICATIONS: If the early returns on holiday shopping are any indicator, people are translating their more ebullient outlook and the additional money left in their wallets after filling up into lots of gifts.  The costs of products should stay down as there is little reason for most retailers to raise prices.  The question, though, is how the FOMC members will balance a clearly strengthening economy with inflation that is generally below desired levels.  I suspect that in next week’s statement, the focus will shift clearly to the economy and the tightening labor market.  The Fed needs to set up its excuse, I mean rationale, for raising rates.  It is not likely it will get much help from too high inflation or even surging wages.  So it needs something else to explain why it is starting on the pathway to rate normalization.  The easiest thing is to focus largely on the economy and that is what I suspect them to do.  As for investors, if anyone can explain why stocks go up or down on any given day, tell me.  I know all the ex post explanations, but today’s excuse du jour, whatever it may be, doesn’t really provide me with any real knowledge.

Economic Indicators, National Association of Home Builders Index, Producer Price Index

October Producer Price Index and November Home Builders’ Index

KEY DATA: PPI: +0.2%; Goods: -0.4%; Services: +0.5%: Food: +1.0%; Energy: -3.0%/NAHB: up 4 points

IN A NUTSHELL:  “While wholesale inflation remains modest, what energy is giving, food is taking away.”  

WHAT IT MEANS:  The economy is solid, jobs are being created and the unemployment rate is nearly at full employment, so the Fed has to shift its attention to something else if it is to come up with the next rationalization of why it is keeping rates low.  Right now, the FOMC seems to be locked into low compensation gains, but there is also the issue of inflation, or its lack thereof, to fall back on.  Some members have already expressed that concern.  When it comes to current and future consumer costs, wholesale prices seem to be telling a confusing story.  The Producer Price Index rose a little more than expected in October.  The large drop in energy costs was supposed to cause the index to decline but there were offsetting increases.  In particular, food prices continue to rise sharply and over the year, they are up a whopping 6%.  In addition, the index presents a variety of services prices, a key differentiation.  Since services comprise 63.5% of the index, this break down better mirrors the economy. The category called “final demand trade services”, which looks at retailing and wholesaling, surged.  As a result, the services component rose strongly.   Excluding energy, wholesale costs have increased by a moderate 2% over the year.  That said, the inflation pipeline is not showing any major problems ahead, even when energy is excluded.

On the housing front, home builders are smiling again.  The National Association of Home Builders’ Housing Market Index jumped in November.  The sales conditions, future sales and traffic components were all up.  The only weakness was in the Midwest.  It will be interesting to see if the current bad weather changes things.

MARKETS AND FED POLICY IMPLICATIONS: The Fed is suffering from wandering-eye syndrome.  First the members were worried about growth and jobs.  When those issues dissipated, they started focusing on the unemployment rate.  When that blew through their target they started talking about wage inflation.  Worker compensation remains muted but even if it starts to move up, there are rumblings that low inflation could become an issue.  In other words, if the Fed wants to keep rates low, they will find something out there that would defend their stance.  However, inflation is inching upward, even as it remains below its desired level.  The rise in producer prices points to a further modest uptick in household costs, but as I have said many times, the pathway from wholesale to consumer prices is hardly straight.   Meanwhile, the economy looks really good and the increase in the Homebuilders’ Housing Market Index reinforces the view that conditions are getting even better.  Thus, I am sticking to my belief that the Fed will start raising rates this spring.  Meanwhile, in the land of make believe, investors may look at the data and say there isn’t enough inflation for the Fed to do anything in the near term and with the economy improving, it is pedal to the metal, or whatever they say.

Economic Indicators, Producer Price Index, Retail Sales

September Retail Sales and Producer Price Index

KEY DATA: Sales: -0.3%; Vehicles: -0.8%/PPI: -0.1%; Goods: -0.2%; Services: -0.1%

IN A NUTSHELL:   “It looks like consumers have pulled back and while declining energy costs should help, there are questions about how strong growth will be going forward.”

WHAT IT MEANS:  Consumers are showing no signs of irrational exuberance.  Actually, there were few signs of any exuberance in the latest retail sales report.  Demand fell in September, but that was expected.  August vehicle sales were off the charts so the easing back to a more sustainable level was known and factored in.  Also, a sharp decline in prices was expected to cause gasoline purchases to drop, which they did.  But even adjusting for those two, sales were still off as demand for building materials, clothing, furniture and sporting goods declined.  We didn’t even shop online, which is a real surprise.  So, where did we buy? Electronics and appliances, and while we were out, we ate out.

The one thing that could cause the Fed to dawdle is concern that inflation could become too low.  The September wholesale prices report didn’t help ease the concerns of those on the FOMC who want to keep rates low for a considerable time.  The Producer Price Index fell as costs of both goods and services were down.  Energy led the way and that trend continues unabated.  That is good for the economy as energy costs are more an indicator of consumer spending power than inflation.  The drop is adding significantly to purchasing power.   The only component where prices jumped was unprocessed consumer food products.  However, that rise came after two months of huge declines.  Meanwhile, processed food costs eased, though they had been rising sharply.  Looking down the road, the rise intermediate and crude food prices indicates that consumer food costs will increase.  Otherwise, the pipeline is largely empty so inflation should continue at a modest to moderate pace.

The New York Fed’s Empire State Survey dropped sharply in October. It remained positive.  The headline overstates what happened.  This is a diffusion index and most of the change came from respondents saying that activity remained the same rather than increased.  There was little change in the percentage that said conditions or orders actually declined.

MARKETS AND FED POLICY IMPLICATIONS: It was expected that households would continue shopping for lots of things at a decent pace, but that didn’t happen and as a result, third quarter growth estimates could be revised downward.  To the extent that issues such as Ebola and ISIL are causing confidence to ebb, the moderating sales may be temporary.  But that is to be seen and since those two concerns have only deepened this month, I am not sure what to expect from the October retail numbers.  This has to worry the Fed, which meets at the end of the month.  With inflation below target and bond yields dropping, the doves will be flying high at the next meeting and we should expect that the “considerable timers” will rule the day.  But for the markets, the turmoil in foreign economies, uncertainty about the Middle East and Ebola and the growing reality that 25% increases in equity prices is neither sustainable nor even rational, may be causing reality to set in.

Economic Indicators, Industrial Production, Producer Price Index

July Industrial Production and Producer Prices

KEY DATA: IP: +0.4%; Manufacturing: +1%; PPI: +0.1%; Goods less Food and Energy: +0.2%

IN A NUTSHELL:  “With manufacturers ramping up production, it is clear the economy is accelerating, but it is doing so without any major inflation pressures.”

WHAT IT MEANS: Consumers may not be spending a whole lot of money but that doesn’t seem to matter to manufacturers.  Production surged in July and the increases were across the board.  Every durable goods and five of the eight nondurable goods sectors raised output levels.   On the consumer side, vehicle assemblies jumped 13% as sales remain strong.  But it wasn’t just what’s left of Detroit.  Output of electronics, appliances and furniture also increased solidly.  Even clothing production was up! There were some soft spots, such as food and energy, but that doesn’t change the picture.  Business goods production rose as a lot more business equipment and construction supplies were churned out.  The manufacturing capacity utilization rate hit its highest level since February 2008. 

While production may be jumping, costs are not.  The Producer Price Index rose modestly in July, helped along by a shape drop in energy costs.  Services costs rose a touch faster but than goods prices but they are still not rising sharply.  There appears to be only one area where wholesale costs are worrisome: Consumer foods.  Finished consumer food goods jumped one percent in July and are up nearly six percent over the year.  Those increases show up in the supermarket and with wages largely flat, households will have less left over after buying food to purchase other goods.

MARKETS AND FED POLICY IMPLICATIONS: Rising output and modest inflation pressures: Who could ask for anything more?  The increase in production is the result of improving economic conditions and that implies hiring should continue to improve and the unemployment rate decline.  Those are necessary conditions to shift the excess of supply in the labor market to an excess of demand and ultimately higher wages.  With producer costs tame, inflation should also continue to be fairly modest, allowing purchasing power to rise once compensation gains pick up.  The Fed members who want to keep holding the economy’s hand will look at the tame inflation numbers and say that policy can remain untouched.  The inflation hawks will say the industrial production gains argue that conditions are changing and the Fed needs to get out in front of any potential inflation pressures.  In other words, nothing will change at the Fed.  These reports, coupled with geopolitical pressures subsiding, at least a little, should put some smiles back on investors’ faces.

Economic Indicators, Industrial Production, Producer Price Index

June Producer Price Index and Industrial Production

KEY DATA: PPI: +0.4%; Goods: +0.5%; Goods less Food and Energy: +0.1%; Services: +0.3%/IP: +0.2%; Manufacturing: +0.1%

IN A NUTSHELL:  “The rise in wholesale consumer product costs may not lead to a large rise in inflation, but the upward trend needs to be watched.”

WHAT IT MEANS: As long as inflation remains well contained, the Federal Reserve can provide unlimited support to the economy.  We have seen a steady, but slow, upward drift in the inflation rate and the June data on wholesale costs indicate that the trend will likely continue.  The Producer Price Index rose sharply but much of that came from a jump in energy costs.  We already know that the upsurge in petroleum prices has already unwound so the headline rise in July will likely be lower.  But as usual, the real information is in the details and they tell a somewhat different story.  Costs at the finished goods levels are beginning to show some real signs of rising inflation.  Finished consumer goods prices have increased by over 3% during the past year even when you exclude energy.  Finished consumer food costs have jumped nearly 5%.  While not all of those increases make their way into retail prices, a lot do and that argues for additional pressure on consumers.  Services costs, though, have been more contained, increasing just under 2% over the year.

On the manufacturing front, output rose modestly in June, but that doesn’t tell the whole story.  The industrial sector rebounded from a terrible January, posting strong gains over the next four months.  Even with the limited increase in June, manufacturing production increased at a nearly 7% pace during the second quarter.  Despite a weather-restricted 1.4% first quarter increase, manufacturing output is rising at a better than 4% pace this year and that is an indication the economy is picking up steam.  Construction activity was solid in June and the output numbers were backed up by a jump in the National Association of Homebuilders’ Index which hit its highest level since January.  The winter is finally over as far as builders are concerned.

MARKETS AND FED POLICY IMPLICATIONS:  It is hard to get worked up over any producer price report as the pathway from wholesale to retail is hardly direct and frequently goes nowhere.  But the increases in finished goods costs are a warning that the days of putting inflation in the back of our minds may be coming to an end.  We are not talking about high inflation, just rising inflation.  We have seen that in the both the Consumer Price Index and Personal Consumption Expenditure Price Index.  The CPI is now over 2% while the PCE is closing in at that level, though excluding food and energy they are still below the Fed’s target.  The Fed probably wouldn’t mind a little acceleration in inflation. It is a lot higher that they worry about.  Right now there is little reason to fret but that may not be the case in by the end of the year.  Investors will probably not think much about today’s data as they are really non-threatening.

Consumer Sentiment, Economic Indicators, Producer Price Index

May Producer Price Index and Mid-June Consumer Sentiment

KEY DATA: PPI: -0.2%; Goods: -0.2%; Excluding Food and Energy: 0%; Services: -0.2%/Michigan Sentiment: 81.2 (down 0.7 point)

IN A NUTSHELL: “Producer inflation pressures took a holiday in May, but it is unclear if that is just a temporary lull or a movement back to a trend of modest wholesale cost increases.”

WHAT IT MEANS: Inflation pressures, what inflation pressures?  After two months of sharp increases in wholesale prices, there were growing concerns that we might be in for some acceleration in inflation.  Those fears were eased, at least to some extent, with the May decline in the Producer Price Index.   The retrenchment was in both goods and services.  Food costs, which had been skyrocketing, reversed field and fell.  The huge volatility in this segment is not unusual but it does create some caution in determining future trends.  On the energy side, the reduction we saw is likely to turnaround as the craziness in Iraq is roiling the oil markets.  While food and energy prices have been changing wildly, consumer costs remain tame.  There was one place where rising prices have to be watched closely.  Transportation services costs are jumping and to the extent they represent rising economic activity – and the growing need to move goods and people – the increase in this component could be signaling that improving conditions could trigger some grab for higher prices.  Looking into the future, there does not appear to be any major pressures building that would be a cause for alarm.

In a separate report, the Thompson Reuters/University of Michigan mid-June reading of consumer sentiment dipped again.  It is interesting to note that in the May report, people felt reasonably good about the economy.  However, they are becoming more and more depressed about their incomes as they don’t expect to see any gains this year.  There is a real disconnect in the business community.   They are doing everything possible to keep wages from rising but then they complain that consumers are not buying.  It is hard to buy more goods when your income is stagnating.  I have said this many times and now we see that the hard cap on wage gains is affecting confidence.

MARKETS AND FED POLICY IMPLICATIONS: Inflation is not likely to be a major issue for the Fed for quite some time.  While wholesale costs are rising at a moderate pace, firms are not passing much of that through and consumer inflation is below the Fed’s desired level.  It will take a lot stronger growth for an extended period for inflation to become a problem.  That allows Fed Chair Yellen to have free reign to keep rates low.  Confidence, wages and consumer spending will remain in its death trap until firms are forced to start bidding for workers.  At that point, spending will pick up and improving confidence will boost it.  But don’t expect anything spectacular until the unemployment rate gets below 6%.   At that point, labor shortages should be widespread enough that wages will start rising fast enough to trigger not only better growth but also words of warning from the Fed about rate hikes.  That time may not arrive until later this year.  Investors will likely be more concerned with Iraq than May wholesale prices. I am not sure how much sense that really makes, as it is not clear there will be any major dislocation of oil supplies.  It is an excuse, though, to take prices up.