PPI report shows goods-makers can't get a good price for their product

Today’s report on the Producer Price Index continued to show that deflation seems to be a bigger risk to the supply end of the economy, more than higher costs might be.

Producer prices for final demand dropped by 0.3%, with goods dropping by 0.4% in September. It also continued a decline in year-over-year producer price growth, with goods prices actually dropping below 0% for the last 12 months in September

But perhaps the bigger story is what happens further “up the line”, as the demand for processed goods also dropped by 0.4%, and unprocessed goods dropped by a lot more.

Over half of the September decline in the index for processed goods for intermediate demand can be traced to prices for basic organic chemicals, which fell 3.8 percent. The indexes for gasoline, commercial electric power, fabricated structural metal, agricultural chemicals and chemical products, and residual fuels also moved lower. Conversely, prices for prepared animal feeds advanced 0.9 percent. The indexes for diesel fuel and for hot rolled steel sheet and strip also increased. (See table 5.)

Unprocessed goods for intermediate demand: Prices for unprocessed goods for intermediate demand fell 1.4 percent in September following a 1.0-percent decline in August. Over half of the broad-based decrease in September can be attributed to the index for unprocessed foodstuffs and feedstuffs, which moved down 1.9 percent. Prices for unprocessed nonfood materials less energy fell 1.6 percent, and the index for unprocessed energy materials declined 0.8 percent….

Product detail: A major factor in the September decrease in prices for unprocessed goods for intermediate demand was the index for slaughter cattle, which moved down 3.7 percent. Prices for iron and steel scrap, slaughter barrows and gilts, crude petroleum, slaughter chickens, and raw milk also fell. In contrast, the index for ungraded chicken eggs increased 55.2 percent. Prices for coal and gold ores also advanced.

And before you get to the final product, there is a dichotomy where processed goods are declining (outside of foods), but nowhere near as much as unprocessed goods.

Processed goods for intermediate demand: The index for processed goods for intermediate demand moved down 0.4 percent in September following a 0.7-percent decrease in August. Almost three-quarters of the September decline can be attributed to prices for processed materials less foods and energy, which fell 0.3 percent. The index for processed energy goods moved down 0.7 percent. In contrast, prices for processed foods and feeds advanced 0.7 percent. For the 12 months ended in September, the index for processed goods for intermediate demand decreased 3.4 percent, the largest decline since dropping 3.7 percent for the 12 months ended July 2016….

Unprocessed goods for intermediate demand: Prices for unprocessed goods for intermediate demand fell 1.4 percent in September following a 1.0-percent decline in August. Over half of the broad-based decrease in September can be attributed to the index for unprocessed foodstuffs and feedstuffs, which moved down 1.9 percent. Prices for unprocessed nonfood materials less energy fell 1.6 percent, and the index for unprocessed energy materials declined 0.8 percent. For the 12 months ended in September, the index for unprocessed goods for intermediate demand dropped 10.1 percent.

10% drop in prices received for unprocessed goods? I don’t know how anyone’s making ends meet on that when rent and other costs of living are going up.

A main culprit in the drop in producer goods prices is the recent decline in oil and gasoline prices, but it’s also a plummeting of prices received for wood and metal materials. This is especially true at the levels closer to the source product themselves.

Processed intermediate goods, September 2019
12-month change
LP gas -60.2%
Gasoline -16.0%
Plywood -16.0%
Natural gas to utilities -15.6%
Steel mill products -11.1%
Building paper and board -10.9%
Softwood lumber -8.7%
Hardwood lumber -8.2%
Aluminum mill shapes -4.8%

Unprocessed goods producer prices, September 2019
12-month change
Wastepaper -42.8%
Natural gas -34.6%
Iron and steel scrap -25.2%
Cruse petroleum -19.2%
Aluminum base scrap -18.1
Wheat -14.9%
Slaughter chickens -10.1%
Slaughter cattle -7.2%

While manufacturing and food processing has had hiring flatten out, but layoffs have still been avoided until now. But if prices for products continue to go down, I can’t see where there aren’t going to be job losses at the manufacturing level that match what we’ve already seen at the farm producer level in the last couple of years.