Deflating prices, and deflated manufacturing?

We’ve got another couple of pieces of inflation data in recent days that’ll have an impact on whether the Federal Reserve decides to give in to the wishes of President Trump and hedge funders, and cut interest rates at the Fed’s meeting next week.

On the consumer side, prices leveled off in May, indicating that inflation isn’t a problem on that side.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in May on a seasonally adjusted basis after rising 0.3 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment.

The food index rose 0.3 percent in May after declining in April, with the food index accounting for nearly half of the May seasonally adjusted all items monthly increase. The energy index fell 0.6 percent in May, with the gasoline index falling 0.5 percent and the indexes for electricity and natural gas also declining in May.

The index for all items less food and energy increased 0.1 percent for the fourth consecutive month. The indexes for shelter, medical care, airline fares, education, household furnishings and operations, and new vehicles all rose in May. The indexes for used cars and trucks, recreation, and motor vehicle insurance were among those that declined over the month.

With oil stockpiles continuing to grow and futures falling nearly 25% in 50 days, I would expect those pump prices to keep dropping in June and later months (well, unless the Trump Administration keeps on stirring up tension by trying to lie their way into war with Iran, of course).

That’s good news for consumers, but it sure isn’t good if you’re in the oil industry. And oil isn’t the only sector struggling with lower prices for their products, as the Producer Price Index for May also showed a decline in growth

The Producer Price Index for final demand rose 0.1 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported [Tuesday]. Final demand prices advanced 0.2 percent in April and 0.6 percent in March. (See table A.) On an unadjusted basis, the final demand index increased 1.8 percent for the 12 months ended in May.

In May, the rise in final demand prices is attributable to a 0.3-percent increase in the index for final demand services. In contrast, prices for final demand goods declined 0.2 percent.

The decline in goods prices is another hit to a manufacturing sector that has only added 5,000 jobs nationwide since February. Some of the biggest decliners were in food, and it was wide-ranging.

Change in producer price index, May 2019 ‘
All foods -0.2%
Milled rice -0.3%
Alcoholic beverages -0.4%
Pasta products -0.9%
Beef and veal -2.9%
Processed chickens -4.5%
Fresh fruits and melons -6.8%

A quick side note for us Cheeseheads- dairy products bucked this trend, increasing by 0.5% in May and 3.4% over the last 12 months. But that still didn’t stop 86 dairy farms from closing last month, as the price increases are proving “too little, too late” for many.

What’s even more concerning is that further “up the line”, prices for producers of goods are dropping even more , which means the deflationary trend is likely to continue for food and other manufacturers.

Within intermediate demand in May, prices for processed goods declined 0.2 percent, the index for unprocessed goods fell 5.1 percent, and prices for services were unchanged. (See tables B and C.)

Processed goods for intermediate demand: The index for processed goods for intermediate demand moved down 0.2 percent in May, the largest decrease since falling 0.9 percent in January. Leading the May decline, prices for processed energy goods dropped 1.4 percent. The index for processed foods and feeds fell 0.5 percent. In contrast, prices for processed goods less foods and energy inched up 0.1 percent. For the 12 months ended in May, the index for processed goods for intermediate demand decreased 0.6 percent, the first decline since falling 0.6 percent for the 12 months ended October 2016….

Unprocessed goods for intermediate demand: The index for unprocessed goods for intermediate demand fell 5.1 percent in May, the largest decrease since dropping 9.6 percent in January 2015. Two-thirds of the broad-based May decline can be traced to prices for unprocessed energy materials, which moved down 8.2 percent. The indexes for unprocessed nonfood materials less energy and for unprocessed foodstuffs and feedstuffs fell 4.5 percent and 1.9 percent, respectively. For the 12 months ended in May, prices for unprocessed goods for intermediate demand decreased 8.9 percent, the largest decline since dropping 10.8 percent for the 12 months ended June 2016.

And from mid-2015 through the end of 2016, this country basically was in a manufacturing recession, with some job losses coming in the face of lower gas prices and lower exports. Sounds a lot like today, especially with declines of 2.2% in both imports and exports for the US in April.

UW’s Menzie Chinn also noted that manufacturing output and hours worked has been falling for pretty much all of 2019.

Now Industrial Production did bump up by 0.4% in May although if you dig into that report the entire increase is due to a strange ramp up in light trucks and warm weather in the South and West causing utilities to run more. But it is still well off where we were at the end of 2018, and those lower prices aren't going to encourage MORE products to come out of factories.

So with evidence of a slowing manufacturing economy and prices stable (if not outright falling), does that mean the Fed drops rates sooner than later, and blows stock and asset bubbles higher? And will the coked-up hedge funders be let down and sell off if the Fed backs off from rate cuts next week and claims the economy is fine?

Very odd and uncomfortable data coming out these days, as I can't think that lower prices in goods-producing sectors won't lead to increased layoffs in the very near future.