“The economy is suffering from disinflation but not outright deflation pressures in the goods and services sectors,”

TO BE NOTED: From the FT:

"US prices drop for first time since 1955

By Alan Rappeport in New York

Published: April 15 2009 14:19 | Last updated: April 15 2009 14:47

Prices in the US declined in the year to March for the first time since 1955, the labour department said on Wednesday, easing fears that aggressive government stimulus measures could kick-start inflation.

The 0.1 per cent monthly decline in March was largely due to falling energy prices and was the first fall after two months of increases. Consumer prices were down by 0.4 per cent year-on-year.

The monthly figure trailed the 0.1 per cent rise that economists had forecast and compared with a 0.4 per cent increase in February.

The drop in prices could renew fears of a deflationary trap that were stoked after prices were flat or declined during the final five months of 2008. As the economic recession deepened in the second half of last year companies slashed prices to clear stocks.

However, core prices, which exclude food and energy and is the measure by which economists judge the risk of general deflation, rose by 0.2 per cent and were 1.8 per cent higher than in March 2008. Core prices also rose by 0.2 per cent in February.

“The economy is suffering from disinflation but not outright deflation pressures in the goods and services sectors,” said Alan Ruskin, strategist at RBS Greenwich Capital.

Energy prices fell by 3 per cent last month after climbing by 3.3 per cent in February. Prices of energy were pulled back by falling petrol prices which were off by 4 per cent in March after rising by 8.3 during the previous month.

Prices fell across most sectors last month, while the cost of medical care, education and communication rose in March.

The slide in consumer prices follows a report on Tuesday that US wholesale prices fell in March after two months of gains due to falling energy prices. The producer price index for finished goods fell by 1.1 per cent last month, trailing economists forecasts that prices would be flat.

Compared with March 2008, wholesale prices were down by 3.5 per cent.

The decline was due to a 13.1 per cent drop in petrol prices. Excluding food and energy, core producer prices were flat last month. Weak capital spending also blunted any inflation as business investment has stalled amid diminished demand.

Separately on Wednesday the Federal Reserve said that US industrial production fell for the fifth month running in March, dropping by 1.5 per cent on weak factory and manufacturing output as global demand has continued to erode.

The monthly decline was worse than economists expected and was driven by falling production of business equipment and construction supplies. Industrial output was off by 12.8 per cent compared with the same month in the prior year.

Economists expected industrial production would fall by 0.9 per cent last month after a 1.4 per cent decline in February. Output has declined in 11 out of the last 13 months.

Utility output rose by 1.8 per cent in February after a 7.7 per cent drop the prior month, as cold temperatures replaced unseasonably mild weather. Mining output was off by 3.2 per cent.

Meanwhile, the capacity utilisation rate, a measure of the proportion of plants in use, across all industries, fell to 69.3 from a revised 70.3 per cent. The figure was lowest since 1967, when the Federal Reserve began keeping such records.

Copyright The Financial Times Limited 2009"

"making the 2008-2009 contraction in consumer spending the longest since WWII."

Rebecca Wilder on News N Economics:

"Beating down the consumer

Consumers have been under extreme duress throughout 2008. Energy prices surged on oil until it fell below $100/bbl in September, which is the month when the labor market took a significant turn for the worse, and the housing market continues to tumble. Not surprisingly, consumers are pulling back. They would have pulled back more were it not for those credit cards, and the decline may continue for two more quarters (three consecutive quarters), making the 2008-2009 contraction in consumer spending the longest since WWII.

(Click to enlarge chart)

The chart illustrates annualized real personal consumer spending (PCE) growth on a quarterly basis spanning the years 1947:1 to 2009:2 and includes Macroeconomic Advisers’ latest forecast (see their website, which must be opened in Explorer and is a paid subscription; email me if you would like a copy). Going forward, consumer spending is expected to mark three consecutive quarters of decline: 2008:3, -3.8%; 2009:1, -2.6%; 2009:2, -0.1%. Sicne 1947, this would mark the first time that consumer spending fell three consecutive quarters.

It is remarkable that the depth of the decline in consumer spending does not make history as well. The forecasted accumulated loss of 1.1% (not annualized) is smaller than the 2.4% that occurred in Q1 and Q2 of 1980, when real PCE fell by an annualized 8.6% in the second quarter. Nevertheless, consumers are cutting back, and will continue to do so into 2009. Note: an annualized growth rate is the annual rate of growth that would occur if each quarter averaged the same amount of quarterly growth. The accumulated growth is the total reduction in spending over the consecutive quarters of PCE decline (the total % loss over Q1 and Q2 in 1980 for example).

Consumers are stressed in 2008 and 2009

Prices, labor, and housing have kept consumers on edge. Oil hit its peak in July and remained above $100/bbl throughout September. Energy prices seriously restricted consumer purchasing power, and spending was cut (reluctantly). Since September, job loss has quickened. The carnage that occurred in the labor and housing markets – around 1.3 million jobs lost since September and the ongoing destruction of housing wealth - is passing through to consumer spending. Consumers are getting a break at the pump – oil was just $34/bbl ending on 12/19/08 – but that is only a minor offset the negative forces currently underway.

Prices played their part

This chart illustrates monthly nominal and real PCE growth from January 2007 to November 2008. In the spring of 2008, nominal and real PCE growth turned negative on average. This was a sharp turn for the worse relative to the average positive PCE growth in 2007.

Seesawing prices have certainly played their part. From January 2008 through August 2008, real PCE growth was greater (less negative) than nominal PCE growth because prices were rising quickly and consumers were holding on as best they could. Since September, weak economic conditions and a masive job loss have driven down headline prices (-1.7% in November), and real PCE gains were smaller than expected. Nominal spending dropped relative to real spending, which grew just 0.6% on the sharp price declines (PCE price index fell 1.1%). Whatever the underlying catalyst, consumers are cutting back hard.

Why has consumer spending not fallen by more? Credit cards

This chart illustrates consumer bank lending, credit card and other (non-revolving) loans, since Christmas of last year. During the first half of 2008 through June, revolving credit was rather stable and other consumer loans were growing. However, since July revolving credit has surged, and other consumer credit has stabilized, if not declined. Many consumers are living on their credit cards, and have been since July.

It is possible that consumer credit takes a stochastic tumble, which would drag down the forecast of consumer spending (see forecast chart above).

Consumers are in trouble. The economy is in trouble. No wonder SpendingPulse called the 2008 holiday shopping climate one of the worst in modern times. It is not surprising that consumers are cutting back: prices, credit, labor, and housing have wreaked havoc on consumer spending. But this cutback is setting up to be the worst in modern history."

Rebecca Wilder

I'm not as negative going forward for a few reasons:
1) Falling prices have actually increased some people's buying power.
2) Some savings increase is a good thing.
3) I believe that employment will pick up next year.
4) Some kind of stimulus will occur next year.
5) Refinancing of homes will lower some people's debt and payments.
6) The Fear and Aversion to Risk will abate next year.
7) At some point, people will realize that this is not as bad a time as the early eighties.
8) Housing prices will stabilize, and, in some markets, begin rising again.
9) The Bush Administration will be history.
10) The Saver Countries will make great efforts to preserve this current unbalanced system, which will remain in place indefinitely because it suits us.
11) The government guarantee will be total.
12) Prosecutions for Fraud will increase.
13) The war in Iraq will begin winding down for us.
14) Spreads on Bonds will have drastically decreased helping funding as the Fear and Aversion to Risk subsides.
15) Inflation will begin, making people feel that they're back in familiar territory.
16) Investment that had been going into housing will go into areas that have been lacking funding.
17) The CDO and CDS markets will functioning.
18) Millions will have read this blog and believe me.