The Mays Report's  Instablog

The Bureau of Labor Statistics reported that producer prices were 0.3 percent higher in November and are 5.9 percent higher than one year ago.

There are a couple notable things in this report. Prices for food items rose across the board from crude to finished goods. Prices of intermediate durable and non-durable goods declined during the month. Durable good prices have tumbled in 5 of the last 6 months. Makers of intermediate and finished goods have really had their profit margins compressed by the volatile prices of crude goods. In November prices of crude non-food supplies rose by 5.9 percent, mostly due to rising petroleum costs.

In my August post on July producer prices I wrote, "I expect inflation to moderate as the lower prices for crude materials move downstream in the value chain in the coming months." . Since that time the price index for crude materials has been volatile, first falling by 2.7 percent in the month immediately following my comment before reversing the very next month and rising by 5.3 percent. Today the index for crude non-food goods is 5.3 percent higher, prices of intermediate goods have declined by about 3% and finished goods manufacturers are receiving marginally higher prices.

With the EUR/USD exchange rate and economic expectations being so volatile attempting to forecast the prices of crude goods appears futile.

The Department of Labor reported that in the week ending December 3rd, the advance figure for weekly jobless claims was 381,000, a decline of 23,000 from the previous weeks revised figure of 404,000. The 4-week moving average is now 393,250, a decrease of 3,000 from the previous week's revised average of 396,250.

Every year at this time those in the market that watch initial claims closely start grumbling about how much higher the unadjusted claims are than the seasonally adjusted numbers. I thought I laid this horse to rest last year with this article. It seems that we have short memories. Or nobody read it. Let's go with the short memory thing.

Source: The Mays Report

As I wrote last year, there is a lot being made of the large jump in the number of unadjusted claims. This peak in the number of unadjusted (NSA) claims is normal and occurs annually. It will reach its annual peak the first or second reporting week of 2012 before returning to normal.

The services sector, which represents 69.6 percent of payrolls in the US, declined unexpectedly in November. The ISM PMI Services index registered 52.0, which is 0.9 percentage points below the previous month. New orders grew during the month and at a faster rate. However, employment fell in November. The decline in employment is consistent in my view with the contraction in order backlogs and rise in inventories. Supplier deliveries also continue to speed up which indicates slowing demand. On a positive note exports have risen for four straight months.

• "Business activity continues to swing back and forth. Customer traffic remains lower than expected, but discretionary spending is fluctuating, making it difficult to find the pulse of the consumer." (Arts, Entertainment & Recreation)
• "Lending is getting a little better. Competition for good deals is fierce because there remains a very limited number of high-quality borrowers." (Finance & Insurance)
• "Raw materials prices appear to be stabilizing, and in some cases are dropping. Diesel fuels remain elevated and have not dropped." (Mining)
• "We currently see no signs of a turnaround. Customers are nervous about the future of their jobs and incomes. Due to this fact, our sales are down and our need to hire more employees is, too." (Accommodation & Food Services)
• "Business is slowly improving. Outlook for the next few months is good." (Retail Trade)
• "In the face of an extremely tight business climate, prices continue to be sticky. We are not seeing significant price moderation." (Management of Companies & Support Services)

The ISM PMI Manufacturing index registered 52.7 percent in November, which was 1.9 percentage points higher than the previous month. The US manufacturing sector has excess capacity as illustrated by the falling backlog of orders, which have now contracted for six straight months. The Supplier Deliveries index has dropped below 50 to 49.9 indicating that deliveries have become faster, which is consistent with slowing domestic demand. Prices continue to fall, albeit at a slower pace.

Eventually production will be inline with the level of new orders, which surprisingly began growing again two months ago. I'll go out on what I think is a long limb and say this is not sustainable beyond a few months if that time is not already upon us. Lower manufacturing employment will be the result.

• "Business still holding its own. Some growth in margin now that some of the raw materials prices have abated. Oil is pushing $100 so that has not been favorable." (Chemical Products)
• "Orders for the remaining two months have increased after an extended 'summer dip' in sales overall. We expect to finish the year approximately 10 percent above 2010." (Electrical Equipment, Appliances & Components)
• "Seeing a slight slowdown in orders; could be related to the holidays." (Primary Metals)
• "Material lead times are getting longer. Seems like no one is hiring. Trying to do twice the output with the same amount of people." (Food, Beverage & Tobacco Products)
• "Japanese auto production has returned to 100 percent, and domestic manufacturing continues to increase." (Fabricated Metal Products)
• "Oil exploration seems to be really picking up. Government is permitting again, so business is the busiest we've ever seen." (Computer & Electronic Products)
• "The EPS ruling about higher fees for coal-generated electricity can have a huge, negative impact on our business if implemented in January 2012. We are at the peak of our seasonal demand push." (Plastics & Rubber Products)
• "Thailand flood impacting our business. Honda and Toyota cut production forecasts, and we are chasing some components made in Thailand." (Transportation Equipment)

I maintain my prediction of a mild recession beginning in the first or second quarter of 2012.