U.S. Factory Production Moves Ahead in October, Energy Costs Pushing Up Inflation

By: Asha_Bangalore

Industrial production held steady in October after a 0.2% drop in the prior month. Activity at the nation's mines (-0.1%) and utilities (-3.4%) declined in October and offset the gains in manufacturing output. Factory production rose 0.5% in October after holding nearly steady for two consecutive months. Nearly all major categories of manufacturing posted gains in October - autos (+5.0%), wood products (+2.5%), machinery (+1.4%), computers (+0.7%) and furniture (+0.8%). The small reversal of a decelerating trend (year-to-year change, see chart 1) is the important aspect to note from the October data.

The operating rate of the nation's industries held steady at 74.8% in October but that of the manufacturing sector rose to 72.7% from 72.3% in September. The main message is that today's report is another one in a string of reports published in November that point to a positive change in the tone of data compared with economic data seen during the April-September period.

Higher Energy Prices Lift Overall Wholesale Prices

The Producer Price Index (PPI) for Finished Goods rose 0.4% in October, matching the gains seen in each of the two prior months. In October, the 3.7% increase in energy prices accounted for the increase in the headline number. Food prices fell 0.1% in October vs. a 1.2% gain in September. Excluding food and energy, the core PPI of finished goods dropped 0.6%, the first drop since October 2009. Prices of new cars and light trucks are included in the PPI in October, which frequently leads to lower prices of cars and light trucks in price measures. Prices of cars fell 3.0% and that of light trucks declined 4.3%. The core PPI appears to have bottomed out in October 2009 (+0.7% yoy increase) and has posted a 1.45% year-to-year gain in October 2010.

At the earlier stages of production, the intermediate and crude price indexes show an acceleration of wholesale prices. However, in a soft demand environment, the pass through of these higher wholesale prices to retail prices is unlikely and has not occurred, as yet.

Asha Bangalore — Senior Vice President and Economist

http://www.northerntrust.com
Asha Bangalore is Vice President and Economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was Consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Copyright © 2010 Asha Bangalore

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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