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Econ Wrap-Up: PPI, Empire State Manufacturing, Business Inventories

10/15/2014
By Jennifer Coombs

A combination of scary news headlines and disappointing economic data sent the markets plunging on Wednesday by the highest percentages we’ve seen in quite some time. From a technical perspective, these consistent and consecutive selloffs have caused the market to reach correction territory. A ‘correction’ is a reverse movement in momentum of about 10% or more in order to adjust for overvaluation. It disrupts the market’s uptrend and usually has a shorter duration than a bear market or a recession… but it can definitely be a precursor to one or the other. Crude oil prices continued to drop, hovering just below $82 per barrel. While worries surrounding ISIS and Ebola continue to weigh on the market, these economic releases are certainly aren’t helping.

Firstly, inflation among US producers has almost disappeared and turned negative. The Producer Price Index (PPI) for all final demand in September declined by 0.1% after posting no change in August. Economists had predicted that inflation would rise by 0.1% in the month. When total demand is calculated minus food and energy, the level was unchanged after decelerating to 0.1% in August. Total final demand (excluding food, energy, and trade services) declined by 0.1% in September after rising 0.2% the month before. On a seasonally adjusted year-ago basis, the PPI final demand reading was up 1.6% in September versus 1.8% in August, and excluding food & energy, PPI final demand was up 1.8% versus 1.6% in August. With the inflation numbers so soft, central banks (not just in the US) should have more than enough leeway to begin easing up on monetary policy. The following chart also demonstrates just how crazy the changes in PPI can be at times.

The twelve major Fed districts will be giving updates on business activity this afternoon in the Beige Book, but New York’s district is already showing some signs of weakness. The Empire State manufacturing index slowed abruptly in October to 6.17 from September’s 5-year high of 27.5. This month marks the slowest rate of monthly growth since April 2014. Within the report, there was a sudden reversal in new orders, coming in at -1.73 for the month compared to 16.86 in September. Shipments were also weak, coming in barely above the zero-line at 1.12 compared to 27.08 in the month prior. There was, however, one major positive component in the report: employment. This reading climbed to 10.23 in October compared to 3.26 in September, and the 6-month outlook showed that optimism still remains strong at 41.66. We note that region Fed reports have been much stronger than the hard data reported from the manufacturing sector all year long. This fact has subsequently sounded alarm bells over the Empire State’s report and raises the concern of new weakness for the factory orders report and the industrial production report.

Lastly, inventory levels continue to be steady, according to the business inventories report, although there is a risk of an unwanted build if the economy begins to slow down in the near term. Overall, business inventories increased 0.2% in August in contrast to a 0.4% decline in sales. Despite this discrepancy, the stock-to-sales ratio remains unchanged at 1.3. This report also includes August inventory data from the retail sector where this morning's September retail sales report showed broad contraction. Retail inventories actually declined in August and relative to sales, the stock-to-sales ratio declined to 1.41 from 1.43. The ratio for autos showed a sharp decline to 2.07 from 2.13; however this should reverse in next month’s report given how weak auto sales were in September. We note that inventory growth is definitely a positive point in GDP calculations, but when the growth is not necessary and not wanted, this is a negative for future production and employment.

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Jennifer Coombs
Wall Street Strategies

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