March PPI Report

March PPI Report

April 19, 2005

I’ll never figure people out. Stock market mavens decided that today’s March PPI report from the Dept of Labor was great news because core inflation was so low. The Dow Industrials and S&P 500 both increased by 0.6% today, and the small caps bounced back 1.6% from the whipping they took last week.

Indeed, if you read all the way to page 14 you will see that prices for finished goods other than foods and energy edged up by only 0.1% in March. On pages 1-13, however, every other number rose a lot, mainly due to higher oil prices. Finished Goods rose 0.7% in March, 4.9% year over year (yoy). Intermediate Goods rose 1.0% (8.7% yoy), and prices for Crude Goods (no, not back issues of Penthouse magazine, this refers to commodities like oil) jumped 4.3% (10.8% yoy). Crude Energy Goods prices jumped 5.5%% in March, up 28.4% over the past twelve months.

I have even more exciting news. The PPI for Finished Goods Less All Goods Whose Prices Increased actually fell for the month.

Overall, the report was not very surprising. Basically, it showed an economy still trying to digest last year’s huge oil price hikes. It shows the declining car and truck prices that have contributed to GM’s credit quality problems. And it shows the softening of metals prices which accompanied the recent escalation in the rhetoric out of Washington over the trade deficit with China, Chinese growth, and US pressure on China to revalue their currency.

There are two additional things I want to point out in the report. Prices received by commercial bankers decreased 6.1% in March, after declining 3.3% in February. This was the manifestation of the dramatic shift in behavior among both bank and non-bank (mutual funds, hedge funds, insurance companies) lenders over the last 10 months. From December 2000 to May, 2004 banks collected $230 billion more from business customers than they loaned, which contributed to the jobless recovery phenomenon.

Since last May banks have reversed course, increasing business loans by more than $70 billion. Indeed, direct loans from non-bank lenders now make up about 75% of new business loans to middle market companies. Competition among lenders is fierce. Lenders have dramatically reduced credit standards, including fees; hence the number in the report.

Needless to say this has driven transaction prices up to silly levels and has already laid the eggs that are going to go bad in a year or two. But for now it means big growth and a strong stock market.

The socond observation is in the fine print. Prices for both Telecommunications Services and Telecommunications Equipment decreased by 0.3% in March, and are both down over the past year, a reflection of the dire situation in telecom capital spending in the US. Meanwhile capital spending in Asia is soaring, which is why the US has fallen from #1 to #14 in global telecom network speed.

Congress has announced they plan to rewrite the telecom law this year. They had better hurry while we still have a telecom capital goods sector that speaks English.


John Rutledge

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