PPI, Empire Reports Both Bad: Uh-Oh

by: Karl Denninger

Now here's a smoking shoot!

The Producer Price Index for Finished Goods rose 1.8 percent in November, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This increase followed a 0.3-percent advance in October and a 0.6-percent decrease in September. In November, at the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 1.4 percent, and the crude goods index rose 5.7 percent. On an unadjusted basis, prices for finished goods moved up 2.4 percent for the 12 months ended November 2009, their first 12-month increase since November 2008. (See table A.)

We can't use the "I" word, right? Well guess what - the PPI report just did, and the result was rather immediate. The futures ticked down fairly strongly, with both bond rates rising and the dollar holding what had been strong gains.

What? Why?

Because Europe is in trouble this morning. Both the pound and Euro are getting trashed - are the PIIGS coming home to roost?

I have said quite some time ago that I believed there was a decent chance the Euro Zone would literally implode - that is, fracture and disintegrate. That's a simple function of the fact that you have producer and leach, er, "consumer" nations in the EU Zone and this sort of imbalance only works while one can expand credit in a willy-nilly fashion to paper over the imbalances.

Now Greece, among others, is facing down the reality of such actions.

Gee, where else in the world has that been tried? Might there be dead Presidents on that nation's currency?

Crude good price pressures are now two months running up over 5% and intermediate goods are accelerating as well. A huge piece of the headline was energy in November but not in October, meaning that we're in big trouble when the crude goods number flows through the python and picks up the energy cost increases as well.

It would not surprise me to see a high single-digit price change for finished goods on the producer end in either January or February - and if so, that is going to spook the market BAD.

The problem appears to be, broadly, energy price speculation (big surprise, right) with y/o/y change up 12.2% This was first signaled last month with an 8.3% annualized rise. The only hope for containment in this regard would be a popping of the energy price bubble - a pop that may be in process now. It better be, or the PPI is going to take off like a rocket and shut down the long end of the bond curve, forcing both The Fed and Government hands.

Service industry producer prices continued to decline, with a big part of it showing up in health care (!) That's unexpected.... are people running into cost pressure between their wallet and hospitals, even with both insurance and "freebies" that can be offloaded to the taxpayer? Maybe.

The internals are interesting on this report. Food prices actually fell on an annualized basis, down 1.7% from last year this month. Finished consumer goods, excluding foods, however, rose 4.7%, a monstrous rise on an annualized basis. Strong gains were found in booze prices (3.6%), gasoline (35.9%!), pharmaceuticals (5.8%), toys (5.4%), tobacco (7.1%) and jewelry (7.4%). Big declines were registered in natural gas (-15.6%), heating oil (-7.1%), electronics (-5.7%) and novelties (-2.4%).

Isn't it funny how heating oil is down 7% while gasoline is up 36% - yet both come from the same place (crude oil)? Hmmm.... is there a bit of a game being played here?

In addition one might ask what the government intends to do about the pharmaceutical problem - in a "zero inflation, zero interest rate" environment drugs are up 6%. Nice eh? Not if you're one of the over-medicated Americans it isn't!

In the capital equipment section prices for computers were down 15.7% (!) and office machines declined 6.4%. The only strong price increases were in ships (5.1%) and heavy trucks (4.2%) with the latter in particular impacted by upcoming emissions regulation changes.

This report paints a picture of extremely weak technology demand, moderately weak industrial tool demand (-2.6%), but cost-push inflation pressures bearing down on the indices through distortions in the energy market and, of course, the "Big Pig Pharma" companies.

The Empire Manufacturing Index appears to confirm the picture here - weak industrial demand - coming in with a huge miss down to 2.6:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers leveled off in December, following four months of improvement. The general business conditions index fell 21 points, to 2.6. The indexes for new orders and shipments posted somewhat more moderate declines but also moved close to zero. Input prices picked up a bit, as the prices paid index rebounded to roughly its November level; however, the prices received index moved further into negative territory, suggesting that price increases are not being passed along. Current employment indexes slipped back into negative territory. Future indexes remained well above zero but signaled somewhat less widespread optimism than in recent months. Indexes for expected prices paid and received declined moderately but remained well above zero.

So this makes two indicators on the same day, both reporting, by my analysis, the same outlook.

The Bottom Line: The pump is wearing off and the ability to reignite the game looks to be quite constrained, as we now are seeing the blowback from The Fed and Government stupidity (stoking speculation via "ZIRP" and spendthrift policies) appear in the PPI - which typically flows through to the CPI in a couple of months.