Producer Prices Fall; Weather Impacts Consumer Sentiment

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Producer Price Index
Paul Sancya/APA worker moves material for roof rails on the production line for the 2015 Ford F-150 at the Dearborn Truck Plant in Dearborn, Mich.
By Lucia Mutikani

WASHINGTON -- U.S. producer prices fell in February for a fourth straight month, pointing to tame inflation that could argue against an anticipated June interest rate hike from the Federal Reserve.

The Labor Department said Friday its producer price index for final demand declined 0.5 percent as profit margins in the services sector, especially gasoline stations, were squeezed, and transportation and warehousing costs fell.

%VIRTUAL-pullquote-The underlying message appears to be that pipeline inflationary pressures remain quite weak, even as energy prices have stabilized and gasoline prices have drifted modestly higher.%"The underlying message appears to be that pipeline inflationary pressures remain quite weak, even as energy prices have stabilized and gasoline prices have drifted modestly higher," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The PPI had dropped 0.8 percent in January. In the 12 months through February, producer prices fell 0.6 percent, the first decline since the series was revamped in 2009.

Economists had forecast the PPI rising 0.3 percent last month and remaining unchanged from a year ago.

Prices for U.S. government debt gained marginally on the inflation data. U.S. stock indexes fell sharply, as a strong dollar threatened to erode the profits of multinational companies and tumbling crude prices pressured energy firms including Chevron (CVX) and Noble (NE).

While the weak inflation backdrop would normally be associated with a struggling economy, there appears to be little reason to worry given the fairly robust labor market.

"We would not take the producer prices report as a sign that the economy is secretly rotten if you pull back the tarp and take a look at the hull. The economy is creating millions of jobs," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

A separate report from the University of Michigan said showed its consumer sentiment index fell 4.2 points to 91.2 in early March. Lower-income and middle-income households said harsh winter weather had left them with high utility bills and disrupted shopping and general business activity.

Bad weather and a now-settled labor dispute at ports on the West Coast undercut economic activity early in the year.

First-quarter GDP growth estimates range as low as a 1.2 percent annual rate and as high as a 2.2 percent rate. The economy expanded at a 2.2 percent rate in the fourth quarter.

June Rate Hike Still in Play

The inflation data came ahead of next week's Fed meeting, where policymakers are widely expected to signal the U.S. central bank's openness to a June rate hike by dropping a pledge to be "patient" in considering such a move because of labor market strength.

With price pressures remaining muted and retail sales extending their decline in February, the Fed could delay the move until September.

"The Fed is probably going to hike even if inflation stays low, whether it's June or September, because they are confident about the strong labor market conditions ultimately leading to higher inflation," said Michelle Girard, chief economist at RBS in Stamford, Connecticut.

The Fed, which has a 2 percent inflation target, has kept its key short-term interest rate near zero since December 2008.

Services accounted for 70 percent of the decline in the PPI last month. The volatile trade services component, which mostly reflects profit margins at retailers and wholesaler, fell a record 1.5 percent in February.

It was pulled down by a 13.4 percent drop in margins at gasoline service stations, reflecting a recent plunge in prices at the pump. Profit margins also fell for apparel, footwear and jewelry retailers, as well as for food and alcohol.

There also were declines in machinery, equipment, parts and supplies wholesale margins, signs that a strong dollar -- it has appreciated more than 17 percent since July on a trade-weighted basis -- was helping to keep a lid on inflation.

A 1.5 percent drop in transportation and warehousing services also weighed on producer prices last month. Energy prices, which had been a drag on producer inflation in recent months, were unchanged in February.

A key measure of underlying producer price pressures that excludes food, energy and trade services was unchanged after a record 0.3 percent drop in January.

"It suggests that the stronger dollar and second-round effects from the decline in energy are still suppressing pipeline inflation," said Blerina Uruci, an economist at Barclays in New York.

-With additional reporting by Sam Forgione in New York.

9 Numbers That'll Tell You How the Economy's Really Doing
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Producer Prices Fall; Weather Impacts Consumer Sentiment
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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