U.S. PPI Increases 0.3% Fueled By Food & Energy Prices

Inflationary pressures continued to be diffused last month by the weak economy, but they increased for those who eat or drive a car. The PPI for finished goods rose 0.3% during October following declines during two of the prior three months. The increase fell somewhat short of Consensus expectations for a 0.5% rise. Though the PPI continued to decline versus the year-ago level, the 1.9% drop is a moderation from the 6.4% y/y decline back in July. Much of that moderation is due to notably sharp price declines during last year's fourth quarter.

The increase in overall producer prices last month was led by a 1.6% (-2.5% y/y) rise in food & beverage prices which reflected the third monthly surge (NSA) in fruit & vegetable prices (15.2% y/y), a one-quarter spike in fresh & dry vegetable prices (-6.7% y/y) and higher dairy product prices (-11.3% y/y).  A 1.6% increase in finished energy prices added to that monthly pressure, though prices still were down 9.4% y/y. Here again, however, the y/y comparisons are similar to those for food & beverage prices. Though prices remained 9.4% lower than last year, the twelve-month comparison has moderated from -29.6% this past July as monthly price declines during last year's fourth quarter were notably sharp. Despite m/m increases, gasoline prices remained down 12.5% y/y, fuel oil prices were off by one-third and natural gas prices were 20.1% lower.

Excluding food & energy prices the PPI fell 0.6% during October. Not only was the decline the third in the last four months, the 0.7% y/y increase was the weakest since early-2004. The m/m decline in the core PPI contrasted with expectations for a 0.1% increase. The PPI for finished consumer goods less food & energy fell 0.5% yet gained 1.1% y/y. That was the weakest annual increase since July 2007. Finished durables prices cratered by 1.2% (0.0% y/y), and prices of core finished consumer nondurable goods rose a modest 0.2%. The 2.0% y/y increase was down from 5.9% as of last November. Capital equipment prices also reflected economic weakness and fell 0.7%, the third decline in the last four months. That pulled the y/y increase down to 0.1% after a 4.3% rise as of last December.

Prices for intermediate goods rose 0.3% due to higher energy prices. The increase contrasted, however, with a 0.2% decline in core prices. These were led by declines in textile, chemical & lumber prices. Intermediate food prices fell 0.2% (-8.4% y/y).  The crude materials PPI increased a sizable 5.4% due to the increase in energy prices though they still remained down by nearly one-quarter from last October. In contrast, core prices showed strength and increased for the seventh straight month reflecting the steady rise in commodity prices.

The producer price data is available in Haver's USECON database. More detailed data is in the PPI and in the PPIR databases.

Short-Term Headline-Core Inflation Dynamics from the Federal Reserve Bank of Richmond is available here

The earlier recovery in industrial production stalled last month after smart, unrevised increases during the summer. The October reading of no change in output also fell short of Consensus expectations for a 0.4% gain. The weakening from earlier increases was widespread amongst sectors. Output of consumer goods was unchanged after strong gains during the prior three months. A 1.6% (-11.6% y/y) decline in motor vehicle output led the weakening.  Output of computers, video & audio equipment also sagged by 0.3% (-8.2% y/y) after three months of increase.

Outside of the auto & high-tech sectors production ticked 0.1% higher during October (-6.9% y/y) following three months of firm gain. The uptick was led  by a 3.6% (-18.8% y/y) jump in primary metals output, a 1.3% (-15.6% y/y) rise in textile mills production and a 1.4% (-5.5% y/y) rise in paper output. Working the other way, however, were widespread declines. Furniture & appliance output continued to slide and posted a 1.9% (-20.1% y/y) decline. Apparel output reversed two months of increase with a 0.8% (-15.0% y/y) decline while petroleum & coal output fell 2.9% (-5.0% y/y). Output of business equipment fell 0.3% (-6.8% y/y) with a 0.9% (-12.4% y/y) drop in electrical equipment output. Reflecting continued weakness in nonresidential building activity, output of construction supplies fell 1.2% (-17.0% y/y), about as it did in September.

Despite the weakening of output, utilization of capacity ticked higher to 70.7%. The increase was caused by an estimated 0.1% (-0.8% y/y) decline in industry capacity. Utilization in the factory sector held steady at 67.9% though it was up from the June low of 65.2%. Utilization in the primary metals are has risen sharply to 56.9% with the rebound in output. There's also been a rise in utilization in the machinery area but it's down most elsewhere.

The industrial production data are available in Haver's USECON database.

Policy Challenges for the Federal Reserve is yesterday's speech by Fed Vice-Chairman Donald L. Kohn and it can be found here .

The EMU trade surplus continued to grow as exports rebounded strongly from a lackluster August that saw them fall by 4%. In September exports are back up, and off to the races.

Exports contribute to growth overallEMU exports now are off by 17.8% Yr/Yr, better than the 24.8% drop for imports. To this point the larger relative drop in imports makes the EMU trade sector a contributor to growth.

Exports are looking solid again Over recent months the contribution of exports to growth is looking even stronger- like a real force instead of a bit of subtle arithmetic. Over six months exports are rising at an 8.3% pace and over 3-months the growth rate is 25.6%. These metrics compare to import annual ‘growth’ rates of -8.5% over six months and of +3.4% over three months. Obviously EMU-region domestic demand is lagging in its developing as imports are still falling rapidly or barely heading higher depending on the period for that calculation. Meanwhile EMU exports are exploiting demand revival elsewhere.

Category-wide rebound in exportsAfter seeing declines across most key categories in August exports showed strong sharp category-wide improvements in September. Imports had a less widespread drop in August but are experiencing some revival in September as well.

Déjá vu all over again?EMU, like China and like Japan, is seeing a revival of export led growth. While China is being lauded for its huge domestic stimulus program at the end of the day it is a net exporter, its surplus is growing, so it is getting stimulus from overseas. Meanwhile the US trade deficit popped up in the wake of surging oil imports and auto imports that came on the heels of its cash for clunkers auto sector stimulus program. Even though the US consumer is late to revive in this cycle foreigners have been quick to glean whatever spoils there are in the US market. All this smacks of business as usual. If the global economy is to be made safer, business as usual will have to change its stripes. Europe, Japan and China if they are to hold their exports focus will have to find markets other than the US to exploit or it will be déjá vu all over again, as that sage Yogi Berra once said.

The news from Canada continues to raise doubts about the forecast of a 2% rise in GDP in the third quarter made earlier by Mark Carney, Governor of the Bank of Canada.  Monthly GDP declined in July and August. The continued strength of the C$ is affecting exports.

Today, data on sales, new and unfilled orders and inventories were released for the manufacturing sector and they were mixed.  Manufacturing sales were lower than expected but the pace of new orders and inventories was more encouraging.  New orders increased 8.3% in September after having declined in July and August.  Inventories continue to decline and the inventory sales ratio is now down to 1.46 from it peak of 1.63 in January of this year.  The ratio is shown in the first chart and is approaching what looks like a normal ratio of around 1.30.

While there may be some doubts about the magnitude of the rise in Canada's third quarter GDP, there is no doubt that the Canadian economy is at a turning point and will show some growth in the third quarter.  Most of the data relating to the Canadian economy released recently has been erratic--a step forward, then some retraction.  Nevertheless, the forward momentum has generally overcome the retraction.   In addition to manufacturing sales, the number of building permits authorized and retail sales are good examples of such data and they are shown in the second chart.  Recent changes in both series are volatile, but the trend for both is clearly positive.