Producer prices in 1992 held down by productivity gains.
At earlier stages of processing, the Intermediate Goods Price Index rose 1.1 percent in 1992 in the wake of a 2.6-percent decrease the year before. The Crude Goods Price Index increased 2.9 percent from December 1991 to December 1992, following a drop of 11.6 percent during the preceding year. Energy prices turned up modestly at both the intermediate and the crude levels after double-digit declines in 1991. Crude foodstuff prices also moved up after falling a year earlier. Industrial material prices turned up at both the intermediate and the crude stages of processing. (See table 1.)
Price increases for many items included in the Producer Price Index (PPI) system were slower in the second half of the year than in the first. The increase in the Finished Goods Price Index, for example, slowed from a seasonally adjusted annual rate of 2.6 percent in the first 6 months of 1992 to a rate of 0.5 percent in the last 6 months of the year. The so-called "core" or "underlying" rate of inflation (that is, for finished goods other than foods and energy) reflected the same pattern, rising at an annual rate of 2.7 percent from December 1991 to June 1992, followed by a 1.0-percent rate of advance from June to December 1992. The index for finished energy goods, which had risen at an annul rate of 7.4 percent in the first 6 months of the year, fell at about the same pace in the second half. Consumer food prices, however, turned up from June to December after casing down slightly in the preceding 6 months.
Industrial material prices also tended to move up more rapidly in the first 6 months of 1992 than in the rest of the year. The index for intermediate materials less foods and energy edged up at a rate of 0.5 percent in the second half, less than the first-half rate of 1.8 percent. Prices for both durable and nondurable manufacturing materials turned down in the second half after first-half increases. The rise in the index for basic industrial materials slowed to a seasonally adjusted annual rate of 1.9 percent from June to December after climbing at a rate of about 10 percent in the preceding 6 months.
Although the recession that had begun in July 1990 had officially ended by the spring of 1991, the recovery for the rest of that year and through most for of 1992 was uncharacteristically sluggish, compared with previous periods of recovery. It was not until the end of 1992 that the gross domestic product reached the same level as it had attained just prior to the start of the recession.
Personal consumption expenditures on goods and services were restrained by the need of consumers to reduce their unusually high debt burdens in the aftermath of intense borrowing during the 1980's. The failure of employment to rebound significantly during the recovery further served to hamper consumer spending. Nevertheless, consumer spending strengthened considerably in the second haft, partly at the expense of savings. Capital investment plans were held in check by unused capacity in many sectors. Export demand was less buoyant in 1992 than in other recent times, largely because many of our major trading partners were also struggling with recession or low growth. The housing sector was again relatively strong; however, the commercial construction sector remained depressed in the aftermath of serious overbuilding in the mid-1980's.
Inflation usually continues to decelerate even well after a recession ends because output normally expands at a faster pace than employment during the early stages of recovery. This results in sizable productivity gains and lower unit labor costs. The unusually slow growth in employment from the March 1991 trough of the recession through the end of 1992 amplified this tendency. This factor was particularly imporant for finished goods, because labor costs are a more critical determinant of the rate of price change for goods at the later stages of processing than for goods that are less processed. Productivity for nonfarm businesses as a whole grew 2.7 percent in 1992, far better than the 0.5-percent rise measured in 1991 and the highest increase for any calendar year since 1972.
The weakness in prices for many kinds of industrial materials during 1992 was somewhat puzzling in a historic perspective. These prices are usually considered a sensitive leading indicator of the status of the general economy. But while most other sensitive economic indicators were pointing towards a strengthening economy by the end of the year, material prices were often far stronger in the first half of the year than in the second. If the economy does in fact continue to improve through 1993, it may be a sign that material prices are currently being driven more by their own special supply situations (for example, by the heavy sales of nonferrous metals from areas in the former Soviet Union) than by shifts in general economic demand. If, however, the economy once again falters, this may indicate that movements in material prices remain a viable prognosticator of the future health of the economy.
Core rate of inflation
Prices received by domestic producers for finished goods other than foods and energy moved up 1.9 percent in 1992, the smallest advance for any calendar year since 1983. The trend towards slower annual increases in the core rate of inflation has been evident each year since the late 1980's:
PPI core rate 1988 ........4.3 1989 ........4.2 1990 ........3.5 1991 ........3.1 1992 ........1.9
A similar pattern was exhibited for several years during the much stronger recovery from the recession that ended in late 1982. The fact that the core rate rose more slowly during the second half of 1992, when the recovery was more pronounced, than in the first 6 months of the year further indicates the compatability of low inflation and recovery.
Thus, the low rate of inflation in the core rate for 1992 cannot be attributed solely to broad economic sluggishness. By the same token, continuation of a low rate of inflation would not necessarily be Jeopardized by a more vigorous expansion in 1993.
Each of the three major stage-of-processing groupings making up the core rate--consumer nondurables other than food and energy, consumer durables, and capital equipment-- rose less in 1992 than they had in the preceding year. A sizable slowdown in the rate of increase for tobacco products was responsible for much of the deceleration in the index for consumer nondurables other than foods and energy. The slowdown for both consumer durables and capital equipment was led by passenger cars and other kinds of transportation equipment.
The index for consumer nondurable goods other than foods and energy moved up 2.8 percent in 1992 in the wake of an increase of 4.3 percent a year before. Prices for tobacco products moved up 6.7 percent over the year. While this was well above the pace of inflation for most other kinds of goods, the 1992 advance represented a considerable deceleration from the increases of about 13 percent in the tobacco products index each year from 1987 through 1991.
The 1992 deceleration for tobacco products in part reflected a marked slowdown in growth in export demand for American-made cigarettes after years of steep increases; some foreign markets even showed a drop in consumption. For many years, foreign demand had been strong enough to offset the impact of declining cigarette consumption in the United States. (Domestic consumption was expected to be about 2.5 percent lower in 1992 than a year earlier.) However, production shifted abroad to some extent during 1992 as American tobacco manufacturers increasingly licensed the use of their brand names by foreign producers. The licensing displaced foreign demand for tobacco products made in the United States. In many parts of the world, American cigarette brand names are considered to be world-class, premium quality. Within the United States, prices for generic cigarettes were cut heavily during the summer to compete within that part of the market which is sensitive to relative price levels.
The Producer Price Index for consumer durables moved up 1.3 percent in 1991, following a rise of 2.0 percent a year earlier. The new cars index inched up 0.6 percent over the year after increasing 3.1 percent in 1991. Domestic manufacturers continued their aggressive downsizing campaigns by cutting labor costs and improving productivity. By doing this, operations could be profitable at lower levels of output. Domestic new car sales in 1992 were up a little more than 2 percent after declining 12 percent in 1991.
The Producer Price Index for capital equipment increased 1.6 percent after rising 2.5 percent in 1991; the 1992 increase was the smallest since 1987. Most of the price deceleration for this index was the result of smaller price increases than in the previous year for civilian aircraft and passenger cars. Movements for most items within the capital goods grouping were relatively flat. While prices for most items within the transportation equipment category were up more than other kinds of capital goods, the effect of these price increases was offset by lower prices for electronic computers.
From December 1991 to December 1992, the crude energy materials index climbed 1.5 percent after falling 16.6 percent in 1991. Similarly, the index for intermediate energy materials (such as diesel fuel) rose 1.8 percent in 1992 after an 11.6-percent drop in 1991. Prices for finished energy goods (such as gasoline) edged down 0.1 percent in 1992, following the 9.6-percent drop in 1991. Energy prices were off sharply in 1991 after Operation Desert Storm ended and alleviated fears of a major supply disruption.
Most of the 1992 upturn in crude energy goods was attributable to the index for natural gas to pipelines, which rose 5.4 percent following a decrease of about 5 percent in 1991. After Hurricane Andrew temporarily interrupted about 5 percent of Gulf of Mexico production, gas prices were bid up as fearful suppliers tried to ensure enough supply. Gas prices peaked in October, about the same time that Congress passed an energy bill which emphasized the use of cleaner sources of energy such as natural gas. Prices retreated at the end of the year, however, as some utilities and manufacturers switched to alternate fuel sources, such as oil or coal.
Prices for crude petroleum dropped 2.2 percent in 1992 after plummeting 30.5 percent in 1991. Members of the Organization of Petroleum Exporting Countries (OPEC) had even more trouble than usual in regulating the output of their members. OPEC production reached its highest level in a decade in November (25.3 million barrels/day), as Kuwait continued to rebuild its oil producing capacity. Domestic production of crude petroleum declined about 3.5 percent over the year.
Prices received by domestic producers of finished consumer foods turned up 1.5 percent, about the same amount as they had fallen in 1991. Consumer food price increases during 1992 were dominated by a surge of nearly 70 percent in the fresh and dry vegetables index; within this category, prices soared for the two most dominant items, tomatoes and lettuce, as supplies were generally lower due to decreased acreage and adverse weather conditions. At the intermediate stage of processing, the index for foods and feeds decreased 0.5 percent following a 0.2-percent decline a year earlier. At the farm level, the Producer Price Index for crude foodstuffs and feedstuffs rose 2.8 percent after a 5.8-percent decline in 1991. Throughout 1992, severe weather conditions in different regions of the country damaged crops and hampered harvests; and wreaked havoc in agricultural markets. However, supplies were often only temporarily limited until harvests from other producing areas came to market.
Prices for nondurable manufacturing materials edged up 0.3 percent from December 1991 to December 1992 after dropping 4.8 percent in the previous year. Price declines slowed for petrochemicals after dropping markedly in 1991. Weak export demand and the addition of new capacity both contributed to oversupply and the continuation of falling prices. However, the declines did not match those of the previous year which followed the collapse of petroleum prices after the Persian Gulf war. Declines also slowed in 1992 for paper, synthetic fibers, and nitrogenates.
The index for durable manufacturing materials rose 1.2 percent after falling 3.7 percent in 1991. Price declines were slower for aluminum mill shapes, flat rolled steel sheet and strip, hot rolled steel bars, cold finished steel bars, and primary platinum. Prices turned up after falling in the preceding year for copper and brass mill shapes and for primary aluminum. Prices rose much faster than in 1991 for hardwood lumber and for building paper and board. Flat glass prices increased after showing no change in the previous year. Price advances slowed, however, for prepared paint and cement. In addition, prices fell faster than a year earlier for primary Icad, zinc, gold, and silver, and for semifinished steel mill products.
The index for materials and components for construction climbed 2.7 percent in 1992, after a slower increase of 0.8 percent in 1991. As mortgage rates continued to decline, from 8.50 percent in December 1991 to 8.22 percent in December 1992, many consumers took advantage of this by either refinancing existing mortgages or by purchasing new homes. These low interest rates boosted housing starts throughout the year, showing considerable improvement over 1991 levels. For 1992, new housing starts were up to more than 1.2 million units--18.5 percent higher than in 1991; however, housing starts in 1991 were at their lowest level since World War II. The 1992 increase was the first st annual increase since 1989, as well as the largest annual increase since 1986.
While most annual price movements among construction materials were in line with more general levels of inflation, prices for many wood-related items soared. Following an 11.7-percent rise in 1991, softwood lumber prices climbed 22.1 percent, the highest yearly advance in almost 20 years. Softwood lumber prices were sharply higher in the first quarter as a result of short supplies. This shortage was exacerbated by the fear that new regulations protecting the Northern Spotted Owl might cause further supply restrictions. Lagging demand and the reduction of the Canadian export duty on logging products resulted in increased imports, pushing prices lower in the second quarter. Demand occasioned by damage from Hurricane Andrew, as well as increased housing starts and short supplies, pushed softwood lumber prices higher again late in the year.
The index for crude nonfood materials less energy turned up 5.6 percent in 1992 after falling 7.6 percent in 1991. This index showed moderate gains through the first three quarters, then showed some weakness early in the fourth quarter before rebounding strongly at the end of the year. As this index is sometimes considered a leading economic indicator, it shows that the economic climate in 1992 improved over that of 1991, although its erratic movement late in the year may signal further rough spots in the economy.
In 1992, price increases accelerated for the logs, bolts, timber, and pulpwood category. Prices turned up for waste paper, cattle hides, and aluminum base scrap. Price declines slowed for raw cotton, iron and steel scrap, and copper ores. In contrast, the phosphate and gold ore indexes fell more than in 1991.
The passenger car rental index rose 17.2 percent in 1992. Charges for passenger car rentals increased sharply on the strength of heavy demand during the traditional summer driving season. Substantially reduced airfares during this period further boosted demand for auto rentals because of the increased travel made possible by the fare cuts. Rental rates also were buoyed by higher purchase costs for the 1993 model-year fleet.
OTHER SIGNIFICANT INCREASES were registered in 1992 for electric power and natural gas utilities, tour operators, scrap and waste materials, marine cargo handling, refrigerated warehousing and storage, and radio broadcasting. In contrast, declines were registered for travel agencies, scheduled air transportation, and for water transportation of freight, not elsewhere classified.
[TABULAR DATA OMITTED]
Craig Howell, William Thomas, Harry Briggs, and Scott Sager are economists in the Office of Prices and Living Conditions, Bureau of Labor Statistics. They were assisted by Roger Burns, an economist in the name office.
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|Author:||Howell, Craig; Thomas, William; Briggs, Harry; Sager, Scott|
|Publication:||Monthly Labor Review|
|Date:||May 1, 1993|
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