Inflation rate ends 2001 down sharply
The producer price index declined 0.7 percent in December, the third straight monthly drop in this series. Both food and energy prices contributed to the drop, although the average monthly decline of 5.2 percent in the fourth quarter of 2001 certainly played a major role in dampening the price index. The total year decline of 1.8 percent was the largest annual drop since 1986 when declining energy prices also held down the index. Excluding food and energy prices, the PPI edged down 0.1 percent in December, the second drop in three months. This helped keep down the rate of increase for 2001 to 0.7 percent, the smallest rise since 1997 when the core PPI was unchanged during the year.

The PPI for intermediate goods and crude materials prices declined sharply in December. Excluding food and energy, these indices were also down during the month. On a year-over-year basis, the crude materials index excluding food and energy is down nearly 10 percent while the intermediate goods index is down about 1.5 percent from a year ago. This suggests that inflationary pressures are not in the pipeline.

The PPI is considered a leading indicator for the CPI. However, it is important to remember that only 75 percent of the PPI is relevant to less than 50 percent of the CPI. This means that the CPI will probably offer friendly news as well, though not as friendly as the PPI since prices of services make up more than 50 percent of the CPI (and aren't included in the PPI). Prices of services are rising moderately, not rapidly, but these will put a floor on the overall CPI figure for the year.

Will manufacturing come back to life?
Factory orders fell 3.3 percent in November, reversing October's 7 percent drop. A plunge in defense orders (which skyrocketed the prior month) kept down total orders for November. However, when one looks at the various components within the report, there indeed are signs of life. Primary metals, machinery, computers & electronic products, electrical equipment, appliances & components, and furniture and related products all posted gains for the month - and in some cases for two straight months.

Economists are cautious in predicting shifts in trends on only two months of data - particularly when the data are known for its volatility. But even the chart above suggests that perhaps we have seen the worst of the manufacturing debacle. The chart incorporates the October and November average, which is up for total new orders and information technology equipment, relative to the previous quarter. The past three quarterly declines already incorporate the sharp declines in industrial production for 2001. If this upward trend from October and November continues, albeit at a modest rate, it could mean a reversal for industrial production in the next few months as well.

Consumer credit rebounds with a vengeance
Consumer installment credit jumped $19.9 billion in November after gaining $11.2 billion in October. There is no question that the zero percent financing incentives offered by automakers caused consumers to take on new debt in the fourth quarter of 2001. Auto incentives are still on, but they are now thinning out. And face it - how many more people can afford to buy new cars after the vehicle sales spurt last quarter? Most likely consumer installment credit growth will moderate in the first half of 2002 even if retail sales pick up. The fourth quarter pace is simply unsustainable.