Food price surprise in PPI
The producer price index fell 0.2 percent in April after posting a 1 percent spurt in March. The April drop was a surprise as most economists had predicted a rise due to increasing energy prices. Indeed, energy prices jumped 2.5 percent in April after a 5.5 percent surge in March. In contrast, food prices unexpectedly plunged 3.2 percent in April. Fruit and vegetable prices did fall sharply, but declining meat prices were the major reason behind the price drop for food prices (because meat prices have a bigger weight in the index than fruits and vegetables). It appears that a Russian poultry ban not only depressed poultry prices, but prices for all meats.

Excluding food and energy prices, the PPI edged up 0.1 percent in April, matching the March gain. This put the yearly rise at 0.4 percent, a bit less than last month. Notice in the chart below the overall downtrend for the year-over-year gain in the PPI excluding food and energy. The total PPI is showing a slight upward trend due to rising energy prices, though it still remains 2 percent lower relative to a year ago.

The PPI for finished goods does not suggest that inflationary pressures are a problem at this time. The PPI for intermediate goods and the PPI for crude materials did post gains in April both with and without the food and energy components. These indexes at earlier stages of processing have some relationship to the finished goods index, but all prices are not necessarily passed along the pipeline. Rising prices in these earlier stages may be reflecting some improvement in the manufacturing sector which had been in the dumps for so long. A pickup in industrial production could lead to at least some minor price gains here and there. Despite the modest gains in April, both the intermediate and crude materials indexes are down from year ago levels.

Productivity spurt temporary
Nonfarm business productivity surged at an 8.6 percent rate in the first quarter after growing at a 5.5 percent rate in the fourth quarter of 2001. The first quarter gain was larger than even the most optimistic estimates and had many analysts quite excited. On Friday before the annual Chicago Bank Structure conference, Greenspan noted that the pace was not sustainable. He said productivity may be strong in the future but not like the first quarter. No kidding.

It is useful to keep in mind how data are constructed, because that helps us put economic news in perspective rather than take it at face value. Productivity is the difference between GDP growth and employment growth, though granted the Labor Department calculation is more complex than that. However, keep in mind that real GDP expanded at a healthy 5.8 percent rate in the first quarter, while nonfarm payroll employment fell at a 0.9 percent rate. At the same, real final sales grew at a modest 2.6 percent rate with the bulk of the GDP gain attributed to a significant moderation in the pace of inventory liquidation (which adds to GDP growth). This is not to say that the productivity figures are wrong. After all, productivity is always calculated in the same manner. But it does mean that the figures are somewhat misleading in their strength. It is better to consider trends in productivity (now rising) rather than outright quarterly growth rates.

The table below shows nonfarm productivity and unit labor costs, but on a year-over-year basis rather than quarterly. First quarter productivity still surged from the fourth quarter, but at just over 4 percent, the rate seems more realistic (than the quarterly pace of 8.6 percent). On a quarterly basis, unit labor costs declined at a whopping 5.4 percent rate, but on a year-over-year basis, the drop was a more moderate 1 percent. The drop in unit labor costs is directly related to the sharp jump in productivity. Notice that unit labor costs tend to decline when productivity is accelerating.

All in all, the productivity figures were indeed positive for the economy. Productivity always tends to rise in the early stages of recovery because producers want to make sure that increased demand is sustained before they re-hire workers. It will be important to see over the coming year whether high productivity trends will prove sustainable (though not at 8.6 percent!).

Consumer credit slows, but for how long?
Consumer installment credit expanded $4.6 billion in March, smaller than the increases of the two previous months. In any case, consumer credit expanded at a snail's pace from December 2001 through March 2002 compared with the giant spurt in October and November. Of course, the wide fluctuations are due to the sharp rise in auto and truck sales late last year followed by subsequent moderation this year. Indeed, the bulk of the slowdown in March, relative to January and February, comes from non-revolving credit (the category for auto loans). Revolving credit roughly doubled in March ($2.6 billion) relative to February ($1.4 billion).

For the second straight month, the debt-to-income ratio stood at 22 percent. This is down from the high of 22.4 percent in November and December. Given the special factors associated with motor vehicle sales, one still has to question whether consumer credit will continue to grow slowly or increase more rapidly in coming months. The debt-to-income ratio increased steadily during the millennium bull market. At the time, many economists insisted that a rising debt burden wouldn't be much of a problem because consumers' net worth was also increasing in line with the stock market. In the past two years, the stock market has plunged but the debt-to-income ratio has not. Will consumers feel the need to retrench on their borrowing levels? The problem is that many consumers increase spending with income, but make liberal use of the credit cards at the same time. It could be that high debt levels these days may be one of the factors that curtails consumer spending in this recovery.