Wholesale Costs Dip 0.4% in July : Industrial Output Down for Third Month in Row
Reflecting a steep drop in energy prices, wholesale prices fell 0.4% in July to mark the fourth month of deflation this year, the Labor Department reported Friday.
In a separate report, the Federal Reserve Board said industrial production, also influenced by the energy price collapse and the consequent near-depression in the oil and gas industries, fell 0.1% in July for the third consecutive monthly decline--the worst such record since the 1982 recession.
Economists viewed both reports as predictable and interrelated, but there was cautious agreement that both the industrial slump and the current round of commodity price deflation may have bottomed out for the time being.
“It’s the end of the line” on sharply lower wholesale prices, said Donald Ratajczak, head of economic forecasting at Georgia State University, a specialist in price trends. He said the dramatic July slump in energy prices--down 11.9% overall, down 19.3% for gasoline, 17.2% for heating oil and 0.5% for natural gas--was what provoked the squabbling oil cartel, the Organization of Petroleum Exporting Countries, to hammer out a schedule last week for stabilizing prices by limiting production.
“That extraordinary July decline in energy prices was the storm before the calm--before the OPEC agreement,” Ratajczak said. “We’ll start seeing the effects of it next month when the August prices are reported, and it might cause as much as a 0.5% increase in the producer price index for September, before it levels off again.”
Indeed, the wholesale price decline last month would have been far steeper were it not for a 1.9% increase in food prices that is widely regarded as temporary, caused in part by the drought in the Southeast.
Food and Energy Costs
If food and energy prices were removed from the July producer price measurement, wholesale prices would have gone up 0.3%--approximately the 3% to 4% annual rate economists believe is the “natural underlying rate” of commodity price inflation. Through July, wholesale prices have fallen 6.2%, and they have fallen 2.3% over the last 12 months.
“We are coming to the end of the best news on commodity prices,” added Allen Sinai, chief economist with Shearson Lehman Bros. “But we won’t see a surge of inflation so much as a bottoming out of deflation.
“For the economy generally, an end to commodity deflation is actually good news,” Sinai said, adding that it could be a sign of improved industrial production in the future.
According to the Fed’s report, durable and non-durable goods manufacturing as a whole was unchanged in July, with the drop caused entirely by a 0.4% decline in oil, gas and coal production and a 0.2% decline in output from utilities.
‘A Ray of Hope’
The slump in oil and gas production, now in its ninth consecutive monthly decline and nearly 9% below production levels a year ago, is caused almost entirely by the dramatic decline in energy prices, and stability there would also help stabilize the industry, economists believe.
“Looking ahead, the mining sector has probably seen the worst, so there is a ray of hope,” Sinai said. “As oil and gas prices stabilize, we could see a bottoming out of the recession in the industrial sector, so there should be a better outlook in the fourth quarter.”
At the same time, Sinai cautioned that any such hopes also depend on the auto industry’s snapping out of its summer sales slump in the fall and on U.S. exports’ responding at last to the hoped-for medicine of a lower dollar.
Robert Gough, a senior vice president at Data Resources Inc., offered similar faint optimism. The industrial production decline was fully to be expected, he said, “because of the depression in the oil patch and because the American manufacturing sector is poignantly learning the lesson that the weak dollar is not a panacea for the trade deficit.”
