Largest monthly PPI drop since 1947!
The producer price index declined 1.6 percent in October, posting its largest monthly decline since 1947! But aside from the sensational headlines, there are special factors that contributed to the drop in October. Energy prices decreased 7.7 percent during the month - with a 21.2 percent plunge in gasoline prices and a 20.9 percent drop in fuel oil prices.

Excluding the volatile food and energy components, the PPI still posted a hefty 0.5 percent decline in October, more than offsetting the previous month's gain of 0.3 percent. But the good news was primarily concentrated in the motor vehicle sector with declines in auto and light truck prices stemming from the zero percent financing. Excluding this special factor, the core PPI was unchanged for the month. That still makes for a good PPI report. As a result, the total PPI is now down 0.4 percent from year ago levels, while the core PPI is up 0.8 percent from a year ago. On the whole, these signal a quiescent inflation picture and should bode well for the CPI figures due out next week.

Productivity on track; unit labor costs slow
Nonfarm productivity grew at a 2.7 percent rate in the third quarter after increasing at a 2.2 percent rate in the previous quarter. The acceleration in growth is unusual given the slight dip in real GDP for the same quarter. However, employment growth declined more rapidly than output helping to maintain productivity gains. On a year-over-year basis, productivity was up 1.8 percent, just a bit better than the 1.5 percent gain posted in the second quarter. Productivity growth is important in helping to improve the nation's wealth since wages can increase without creating corresponding gains in inflation.

Unit labor costs increased at a 1.8 percent rate in the third quarter, substantially less than the 6.4 percent growth rate posted in the fourth quarter of 2000! On a year-over-year basis, unit labor costs are up 3.9 percent, down from the faster pace of the previous three quarters. Lower labor costs help companies reduce total costs and increase their profit margins. A weaker economy in the fourth quarter should reduce labor costs further.

Consumer behavior
Consumer installment credit expanded $3.2 billion in September, half as fast as the $6.1 billion gain in August, but both months were a turnaround from June and July declines in credit. Given the slower pace of motor vehicle sales and outright drop in retail sales in September, the more moderate September gain in credit is not surprising. Expect a surge in credit in October and November coming from the auto sector.

On the whole, consumers have scaled back their borrowing, which is not surprising in light of the slower pace of consumer spending this year versus last year. Aside from the surge in auto credit, we may see more moderation in coming months as consumers try to improve their balance sheets. It is also likely that all the refinancing activity that has taken place in the past year has led consumers to pay off higher-interest credit card debt with lower-interest mortgage debt.

The consumer credit data is old news. On Friday the University of Michigan reported that consumer sentiment ticked higher in early November to 83.5 from 82.7 in October. While the gain is small, it does suggest that consumers may start to regain some optimism. Hopefully for retailers, this will translate into somewhat improved sales for the holiday season.