Consumer prices slip in March, but manufacturing output falls, too

The economy’s performance in March offered a mixed picture, according to government data released Wednesday, with declining demand for appliances, furniture and other goods pulling down manufacturing output for a fifth straight month but falling fuel prices putting more money into consumers’ pockets.

Industrial production dropped 1.5% in March, and the amount of production capacity manufacturers used reached 69.3% -- the lowest level since the government began collecting the data in 1967.

And reflecting a dramatic drop in energy costs, the consumer price index fell 0.1% in March and recorded its first 12-month decline since August 1955, according to government data released Wednesday.

The consumer price index dropped 0.4% from March 2008 to March 2009, according to the Bureau of Labor Statistics, largely the result of energy prices that declined 23% and gasoline costs that fell 39%, or about $1.30 a gallon.

Still, the psychological boost from the lower gas prices isn’t translating into higher retail sales -- consumers are hesitant to go shopping with the extra dollars they’re saving at the pump. Retailers, whose sales unexpectedly fell 1.1% in March after showing some signs of improvement earlier in the year, are working through their inventory backlog and have reduced their factory orders, analysts said.

As a result, manufacturing output for the first quarter dropped at an annual rate of 20%, according to the report issued by the Federal Reserve Board, representing the largest quarterly decline during this recession.

“This is a very severe production decline,” said Nigel Gault, chief U.S. economist for IHS Global Insight. Noting that sharp declines occurred across the board in manufacturing sectors such as furniture, appliance and business equipment, he added: “Everybody is being hit very hard.”

The drop in consumer prices is driven largely by the drop in energy prices.

The price of regular-grade gasoline is expected to average $2.17 this year, compared with $3.26 in 2008, according to the Energy Information Administration. The prices -- with about 5.1 million more people having joined the ranks of the unemployed since the recession began -- reflect a declining demand for petroleum. Crude oil is expected to average $53 a barrel this year, down from $100 a barrel last year.

“People are still not driving much -- even with the cheapest gas in four to five years,” said John Townsend, spokesman for AAA Mid-Atlantic, adding that Americans have driven 122 billion fewer miles than usual since the recession began in December 2007. “People don’t have jobs to go to, they don’t feel good financially, and they’re fearful there will be a repeat of last year when prices went up to $4,” he added.

Analysts saw in the consumer price index benefits not only for consumers but also for the economy. Excluding fuel and food, prices in the index rose 0.2% in March and 1.8% over 12 months, for now dispelling recent concerns that the economy was heading into a deflationary spiral that would further undermine wages and employment.

“We do not see problematic deflation taking hold,” said Mark Vitner, senior economist at Wachovia Economics Group. “Lower prices are good for the consumer.”

Also Wednesday, the Federal Reserve released its most recent Beige Book -- the eight-times-per-year collection of anecdotal economic reports from the Fed’s 12 districts across the nation.

Although it still paints a dim picture of the economy, it’s not as bad as the last few.

Here’s the lead to the report:

“Reports from the Federal Reserve Banks indicate that overall economic activity contracted further or remained weak. However, five of the 12 districts noted a moderation in the pace of decline, and several saw signs that activity in some sectors was stabilizing at a low level.”

The Beige Book is so titled because of the color of its cover.