July 16, 2014

Producer Price Increases Exceed Expectations, Factory Output Trails Them

Filed under: Economy,Taxes & Government — Tom @ 9:47 am

Producer prices went up a seasonally adjusted 0.4 percent in June. The prediction was for 0.2 percent.

Producer prices went up a seasonally adjusted 0.8 percent during the quarter (+0.6 in April, -0.2 in May). If we see a similar result with consumer prices, it would seem to imply that the GDP inflator in the second quarter’s GDP calculation needs to be in the neighborhood of an annualized 3.0 percent — far higher than what we’ve seen in previous quarters.

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Update, 10:00 a.m.: Given that much of what may have been bought or consumed in the second quarter would have been produced in prior quarters, there’s justification for a lower GDP deflator than just indicated. But it seems like it should be higher than the 1.3 percent or so we’ve typically seen in previous quarters.

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Meanwhile, industrial production, expected to rise by 0.3 percent, rose by 0.2 percent.

If anyone can tell me why the Fed is correct when it says that industrial production “advanced at an annual rate of 5.5 percent for the second quarter of 2014,” let me know. I think it’s a typo, and that the increase is really 2.5 percent. No change in April, +0.5 in May, and +0.2 in June could lead to a 2.5 percent result; it can’t possibly lead to +5.5 percent.

That quarterly increase of 0.7 percent (0.5 plus 0.2) is less than half of the 1.6 percent revised increase seen during the first quarter, and we know (at least until the July 30 revision) that the far better number occurred during a quarter of GDP contraction.

Manufacturing output increased by only 0.1 percent.

Zero Hedge logically asks:

Does this look like a Q2 recovery bounce that is strong and supportive of 3% GDP growth?

No it doesn’t. Not at all.

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5 Comments

  1. It looks like the 5.5% is coming from an average of the Jan-Mar compared to an average of May-June months.

    Comment by Scott — July 16, 2014 @ 10:27 am

  2. Actually, this whole quarter average versus the value at the end of the quarter has me thinking.

    Shouldn’t the growth be calculated using the last month of the quarter value and not the average of the months in the quarter?

    Otherwise the 1st estimate is already a month-old (on average). And by the time you get the third revision, it is telling you how the economy was 4-5 months ago.

    Comment by Scott — July 16, 2014 @ 10:38 am

  3. That seems right. About 103.6 divided by about 102.2 times four. Thanks.

    Actually all of the production during the quarter divided by all of the production in the previous quarter is a logical way to calculate it. That said. Quarter-end looks would tell us how much better/worse off we were on June 30 vs. March 31, which is not the same thing.

    That said, the real acid test would be to look back to 4Q13:
    http://www.federalreserve.gov/RELEASES/G17/current/table11.htm

    - 4Q13 average — 100.3
    - 1Q14 average — 102.2
    - 2Q14 average — 103.6

    So 1Q14 vs. 4Q13 was a 1.9% increase, and we got a contraction (even after inventory change).

    2Q14 vs. 1Q14 is about a 1.4% increase. That’s worse. Hard to see how that will lead to a fantastically positive result (again excluding inventory change).

    Comment by Tom — July 16, 2014 @ 11:01 am

  4. Remember, the annual revision to 1Q2011-1Q2014 GDP is due at the end of the month. While I have no doubt there will be a crooked number after the positive sign in 2Q2014 real GDP change, I have no confidence that it won’t be entirely due to prior quarter revisions.

    Comment by steveegg — July 16, 2014 @ 2:28 pm

  5. Think you had a typo on 4Q13. Looks like 101.3. That makes approx. 0.9% and 1.4% for the 2 quarters. Still, not seeing how this turns -2.9% into greatness.

    Comment by Scott — July 16, 2014 @ 3:27 pm

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