Deflation clearly arrived in March

Late this week, there was clear evidence that deflation is in place is much of America. That first showed up in the Producer Price Index report, whioch involved a survey that goes back to March 10, before much of the economy shut down due to COVID-19 issues.

The Producer Price Index for final demand fell 0.2 percent in March, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices declined 0.6 percent in February and increased 0.5 percent in January. (See table A.) On an unadjusted basis, the final demand index advanced 0.7 percent for the 12 months ended in March.

In March, the decrease in the final demand index can be traced to a 1.0-percent drop in prices for final demand goods. The index for final demand services moved up 0.2 percent.

Prices for final demand less foods, energy, and trade services declined 0.2 percent in March, the largest decrease since falling 0.2 percent in October 2015. For the 12 months ended in March, the index for final demand less foods, energy, and trade services rose 1.0 percent.

And that drop in goods is what jumps out at me. If you put the information in this chart together, not only are producers getting less money for their goods now vs March 2019, but also March 2018.

And the next step up the chain had an even larger drop in prices, led by the collapse in oil and gas prices.

The index for unprocessed goods for intermediate demand fell 8.0 percent in March, the largest decrease since moving down 9.5 percent in January 2015. Over 80 percent of the March decline can be traced to a 19.1-percent drop in prices for unprocessed energy materials. The index for unprocessed foodstuffs and feedstuffs moved down 3.6 percent. Conversely, prices for unprocessed nonfood materials less energy advanced 1.3 percent. For the 12 months ended in March, the index for unprocessed goods for intermediate demand declined 15.4 percent, the largest decrease since a 16.4-percent drop in February 2016.

So even before the layoffs and lack of demand hit, you were seeing the wheels in motion for a continuing recession in manufacturing, since there is little reason to expand production if you can't get any money for it.

Then on Friday, the Consumer Price Index showed a similar decline.

U.S. consumer prices fell by the most in more than five years in March and further decreases are likely as the novel coronavirus outbreak suppresses demand for some goods and services, offsetting price increases related to shortages resulting from disruptions to the supply chain.

With the country virtually at a stand-still, the economy rapidly contracting and millions unemployed as state and local governments adopt stiff measures to control the spread of COVID-19, the respiratory illness caused by the coronavirus, economists are predicting the disinflationary trend will persist for a while or even a short period of outright deflation.

"The big concern right now is deflation," said Gus Faucher, chief economist at PNC Financial in Pittsburgh. "Deflation is likely to take hold over the next few months as businesses slash prices in response to much lower demand from the coronavirus outbreak and associated restrictions on movement."

The Labor Department said on Friday its consumer price index dropped 0.4% last month amid a tumble in the cost of gasoline, and record decreases in hotel accommodation, apparel and airline ticket prices. That was the biggest drop since January 2015 and followed a 0.1% gain in February. In the 12 months through March, the CPI increased 1.5%, the smallest advance since February 2019, after accelerating 2.3% in February.

Interestingly, the drop in consumer prices led to a major leap in real average hourly earnings for March. That may surprise you, given all of the layoffs that started in March and the decline of more than 700,000 jobs in that month.

Real average hourly earnings for all employees increased 0.8 percent from February to March, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from an increase of 0.4 percent in average hourly earnings combined with a decrease of 0.4 percent in the Consumer Price Index for All Urban Consumers (CPI-U).

This broke several months of stagnation in this statistic, as you can see here.

BUT…you had to have a job in order to enjoy the benefit of those higher real hourly wages. And even if you were fortunate enough to still be working, many weren’t working as much, so they really weren’t much better off.

Real average weekly earnings increased 0.2 percent over the month due to the change in real average hourly earnings being partially offset by a 0.6-percent decrease in the average workweek.

Which leads to a red flag that I saw in last week's March jobs report that went beyond the large numbers of jobs lost.

The average workweek for all employees on private nonfarm payrolls fell by 0.2 hour to 34.2 hours in March. The decline in the average workweek was most pronounced in leisure and hospitality, where average weekly hours dropped by 1.4 hours. In manufacturing, the workweek declined by 0.3 hour to 40.4 hours, and overtime declined by 0.2 hour to 3.0 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls decreased by 0.3 hour to 33.4 hours.

And that manifested itself in this disparity that showed up in that report, where the widely reported U-3 figure went up by less than the U-6 figure, which illustrates the number of UNDERemployed on top of the number of people not working at all.

Change in unemployment March 2020 vs Feb 2020
U-3 Up 0.9%
U-6 Up 1.7%

This drop in prices is something that explains why the Fed, Congress and President Trump is pumping so much money into the economy. Because there needs to be a way to pump up prices and stop a deflationary spiral. And given what we've seen on the crop futures markets in the last month, it's not going to get any better in April. And until demand and jobs come back and allows prices to rise, the recession will linger even when we get on the other side of the COVID-19 curve.