This morning’s PPI and industrial production figures were both notably weaker than expected with PPI coming in at just 0.4% for the month of October – well below expectations of 0.8%. The core actually fell on the month as discounts for cars led the declines (also the reason for the strong retail sales report the other day). All in all, PPI is trending higher, however. Econoday reports:
“Inflation at the producer was more moderate than expected in September with the core tugged down by discounts in motor vehicle prices. The overall PPI inflation rate held steady at 0.4 percent in October, coming in significantly below the consensus forecast for a 0.8 percent increase. At the core level, the PPI surprisingly fell 0.1 percent, down from a 0.1 percent gain in September and coming in lower than the median forecast for a 0.1 percent uptick. The core was led down by a 3.0 percent drop in passenger car prices and a 4.3 percent decrease in light truck prices”
“For the latest month, food slipped 0.1 percent after jumping 1.2 percent in September. The energy component spiked 3.7 percent, following a 0.5 percent increase in September. Gasoline surged a monthly 9.8 percent in October, following a 1.8 percent dip the prior month. For the food component, a majority of this decrease is due to an 8.1 percent drop for fresh and dry vegetables.
For the overall PPI, the year-on-year rate increased to 4.3 percent from 4.0 percent in September (seasonally adjusted). The core rate softened to 1.4 percent from 1.5 the previous month. On a not seasonally adjusted basis for October, the year-ago the headline PPI was up 4.3 percent while the core was up 1.5 percent.
However, producer price inflation is strengthening in earlier stages of production. Intermediate goods prices rose 1.2 percent in October following a 0.5 percent increase in September. Crude goods surged 4.3 percent, following a 0.5 percent decline the month before. On a year-ago basis, intermediate is up 6.4 percent (not seasonally adjusted) while crude is up 17.0 percent.
Overall, producer prices for finished goods are softer than expected but inflation upstream is notably hotter.”
Industrial production and capacity utilization came in weaker than expected with a 0% print in industrial production and a slight uptick in capacity utilization at 74.8%. This remains well below average and gives investors an excellent perspective on just how weak the current recovery is. Utilization over 80 tends to coincide with periods of robust economic growth and rising inflation. At 74.8% we are woefully shy and near past recession lows. If you’re wondering why this still feels like a recession look no further than this data:
“Industrial production was unchanged in October after having fallen 0.2 percent in September. For the manufacturing sector, output gained 0.5 percent in October after having risen 0.1 percent in September. Factory production in September was initially reported to have decreased 0.2 percent, but incoming data on steel, fabricated metal products, machinery, and chemicals helped boost the index. The output of utilities dropped 3.4 percent in October, as unseasonably warm temperatures reduced demand for heating. Production at mines fell 0.1 percent. At 93.4 percent of its 2007 average, total industrial production in October was 5.3 percent above its year-earlier level. The capacity utilization rate for total industry was flat at 74.8 percent, a rate 6.6 percentage points above the low in June 2009 and 5.8 percentage points below its average from 1972 to 2009.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.