Producer Prices Dip, Factory Data Mixed

Thu Jul 15, 2004
By Alister Bull

WASHINGTON (Reuters) - U.S. producer prices shrank unexpectedly last month after energy prices slumped, soothing inflation worries, while jobless claims rose and industrial production fell, according to government reports released Thursday.

Overall finished goods prices declined 0.3 percent amid plummeting gasoline prices, after a 0.8 percent rise in May. This was the largest drop since May 2003.

The closely watched measure of core producer prices, which strips out volatile food and energy costs, gained by 0.2 percent.

Wall Street expected both overall PPI and the core measure to rise by 0.2 percent on the month and the data provides a prelude to Friday's key report on consumer inflation.

"The 0.2 core number keeps everyone happy. It keeps manufacturers happy, the Federal Reserve happy and investors happy," said Mark Zandi, chief economist at Economy.com.

U.S. Treasury bond prices hovered after the data, relieved by the tame inflation number, but markets were still aware of rising prices in the economy.

On a 12-month basis, the core producer price index crept up to 1.8 percent from 1.7 percent last month. Over the last 12 months, overall producer prices have risen 4.0 percent.

The Federal Reserve, which recently raised U.S. interest rates a quarter point to 1.25 percent to keep inflation at bay, is scrutinizing all fresh price information as it works out how much monetary tightening is needed as the economy powers ahead.

"We had the drop in the total (PPI). That is welcome. But everyone is focusing on the core. That is what the Fed is going to focus on. That does not look as good. It suggests 'measured' is still appropriate for the Fed," said Stuart Hoffman, chief economist at PNC Financial Services.

Analysts expect the Fed to take its time in raising interest rates after it said at its latest policy meeting that it expected to be "measured" in removing monetary policy accommodation. The market's consensus estimate is for the fed funds rate to end 2004 at 2.0 percent and be at 3.5 percent by the following December.

Food and energy prices had been driving the overall index and both components fell.

Energy prices declined 1.6 percent in June with gasoline down 5.2 percent, the largest drop for both measures since May 2003. The reversal was payback for May when energy prices had risen 1.6 percent and gasoline advanced 5.7 percent.

Finished food prices shrank by 0.6 percent after rising 1.5 percent in May.

In other data, output at U.S. factories, mines and utilities fell unexpectedly in June, recording its largest drop in more than a year. Industrial production fell 0.3 percent in June after a downwardly revised 0.9 percent May increase, where Wall Street had expected a flat reading.

But separately, the Federal Reserve Bank of New York posted a substantial rise in its July Empire Manufacturing Survey, signaling factories in New York state made a positive start to the third quarter. The business conditions index climbed to 36.5 from a revised 29.9 in June.

Jobless claims, meanwhile, were somewhat larger than expected after a very large drop the previous week, with Labor Department officials citing seasonal factors.

Initial claims for jobless benefits rose 40,000 to 349,000 while the four-week moving average of filings, which smoothes weekly fluctuations, advanced 3,250 to 339,000.

"Claims only went up 40,000. The numbers this time of year are notoriously suspect because of auto plant shutdowns for retooling. The labor market is okay. It's not great, but it's OK," said Cary Leahey, senior U.S. economist at Deutsche Bank Securities.

Optimism was also signaled by business inventories, which grew for the ninth straight month in May, posting a 0.4 percent rise suggesting firms are optimistic about future sales.

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