|
Article Excerpt
In a turnaround, the Producer Price Index (PPI) for finished goods fell 0.9 percent in 2008 after having risen 6.2 percent in 2007. (1) The 2007 increase was the largest calendar-year advance since a 7.1-percent jump in 1981, and the 2008 decline was the first year-over-year decrease since a 1.6-percent drop in 2001. Similarly, the index for intermediate materials, supplies, and components--which reflects selling prices for goods produced at earlier stages of processing--moved down 2.3 percent in 2008 after having climbed 7.1 percent in 2007. (2) The index for crude materials for further processing--that is, unprocessed goods and raw materials--dropped 24.6 percent in 2008 following a 19.8-percent rise in 2007. The decreases at the earlier stages of processing also were the largest calendar-year declines since 2001, when the intermediate goods index moved down 4.0 percent and crude goods prices fell 32.5 percent. The reversals in 2008 are primarily attributable to prices for energy goods, which plummeted after having increased sharply a year earlier. In addition, prices for foods within the finished and intermediates goods stages advanced at much slower rates than they had in 2007, while the crude foodstuffs and feedstuffs index turned down in 2008.
Changes in the PPIs for services were not consistent with those of the mining and manufacturing sectors. Price increases for total transportation and warehousing industries slowed to 3.1 percent in 2008 from 6.6 percent in the previous year, and the index for total traditional services industries rose 0.3 percent following a 1.8-percent increase in 2007. By contrast, margins received by total trade industries rose 7.3 percent in 2008 after having gone up by 3.9 percent a year earlier.
Stages of processing
Table 1 displays annual percentage changes in PPIs for selected stages of processing. In early-to-mid 2008, broad-based price increases that had begun accelerating in 2007 remained widespread across all stages of processing. The reversal that followed is most vividly demonstrated by price changes in the energy sector. (See chart 1.) Prices for crude energy materials climbed 58.6 percent during the first 7 months of 2008, only to fall 57.3 percent over the final 5 months of the year. (Crude energy materials include crude petroleum, natural gas, and coal.) Prices for intermediate energy goods surged 25.1 percent during the first 7 months of 2008, only to drop 37.4 percent over the remainder of the year, while the finished energy goods index jumped 19.2 percent though July and decreased by 33.9 percent during the rest of 2008. (3) Within the energy sector, changes in prices moved through successive processing stages almost instantaneously. (4) In the foods and feeds sector, PPIs exhibited similar, though less extreme, price movements. (See chart 2.) After having climbed 24.9 percent in 2007 and another 8.5 percent during the first 7 months of 2008, prices for crude foodstuffs and feedstuffs fell 20.7 percent during the final 5 months of the year. The earlier increases, while rather broad-based, were particularly strong for grains and soybeans. The subsequent reversal also was widespread, with decreasing prices for raw fluid milk, grains, soybeans, and slaughter cattle leading the turnaround. Further down the production chain, the index for intermediate foods and feeds surged 17.8 percent in the first 7 months of 2008, outpacing a 17.2-percent jump in all of 2007. These gains were driven by rising prices for grain-based and soybean-based processed goods, such as prepared animal feeds, flour, and oils. In a sharp turnaround, a 13.4-percent retreat in intermediate foods and feeds prices during the last 5 months of 2008 mainly was due to falling prices for prepared animal feeds, flour, and dairy products. Index movements for finished consumer foods were less extreme. Led by higher prices for cereal and bakery products, beef, and oils, this index advanced 4.9 percent during the first 7 months of 2008. Over the final 5 months of 2008, prices for finished consumer foods declined 1.4 percent in response to falling prices for dairy products and for fruits and melons.
In contrast to the energy and food sectors, the 2008 index movements for the "core" sectors (sectors comprising goods other than foods and energy)5 were not consistent throughout the various stages of processing. (See chart 3.) Within the category of crude nonfood materials less energy, price increases accelerated from 15.6 percent in 2007 to 31.8 percent in the first 7 months of 2008. Over the remainder of the year, however, this index tumbled 42.4 percent. The turnaround can be traced primarily to metals prices. After prices for iron and steel scrap, nonferrous scrap, and nonferrous metal ores surged 90.6 percent, 13.7 percent, and 14.5 percent, respectively, in the first 7 months of 2008, prices for the same goods dropped 66.0, 49.7, and 42.1 percent, respectively, during the remainder of the year. Further down the production line, prices for intermediate goods other than foods and energy moved up at roughly the same rate in 2008 as they had in 2007. A more in-depth review, however, shows that the indexes for intermediate materials for manufacturing reversed course during the year 2008, (6) whereas price increases for components and supplies (7) accelerated in 2008, compared with the prior year. Similarly, prices for finished goods other than foods and energy rose more in 2008 than they had a year earlier. Examples of price acceleration in 2008 within intermediate core goods include fabricated structural metal products, plastic products, and agricultural chemicals. For finished core goods, an upturn in motor vehicle prices, as well as larger gains in civilian aircraft and pharmaceutical prices, led the faster rate of advance in 2008. More highly processed goods commonly exhibit price movements that are somewhat different from price movements for less processed goods, since basic material costs tend to be a smaller portion of total costs for producers of more highly processed goods than for manufacturers of less processed goods. Also, contracts and escalation agreements can delay or mitigate the pass-through effect of early-stage price volatility at successive stages of processing. (8)
[GRAPHIC 1 OMITTED]
[GRAPHIC 2 OMITTED]
[GRAPHIC 3 OMITTED]
Economic downturn and shifting producer prices
The 2008 downturn in producer prices can be traced to sluggish demand for both extracted and manufactured goods. The earlier runup in prices did not have traction because of--at least in part--this underlying weakness, as demonstrated by United States Gross Domestic Product (GDP) figures. As economic malaise spread worldwide, the dropoff in production deepened and business demand continued to weaken. Following a 3.6-percent rise in 2004, U.S. GDP growth steadily slowed. (9) From 2005 through 2008, the annual growth rates for U.S. GDP were 2.9, 2.8, 2.0, and 1.1 percent, respectively. Quarterly data for 2006 through 2008 provide additional insight into this slowdown. (See table 2.) Beginning in mid-2006, business spending on gross private domestic investment entered a general state of decline. In 2008, a drop in personal consumption expenditures was particularly noteworthy in that goods expenditures fell precipitously, while expenditures on services continued to inch higher. U.S. exports of goods also decreased at a sharp rate in the latter half of 2008, as an appreciating dollar made American goods more expensive in export markets. (10)
The economies of many other countries also performed poorly in 2008. (11) GDP in Japan fell at 3.6-, 2.3-,and 12.7-percent seasonally adjusted annualized rates in the second, third, and fourth quarters of 2008, respectively. In the Euro Area (EA15), GDP moved down 0.3 percent in each of the second and third quarters and 1.6 percent in the final quarter of 2008. After a flat second quarter, GDP in the United Kingdom declined 0.7 percent and 1.5 percent in the third and fourth quarters, respectively. In China, GDP growth slowed from 10.4 percent in the second quarter to 9.0 percent in the final quarter of 2008. Among developing countries as a whole, GDP growth was projected to be 6.3 percent for all of 2008, compared with 7.9 percent in 2007.
The economic downturn is reflected also in weaker U.S. industrial production and capacity utilization data from the Federal Reserve. (12) In the final quarter of 2007 and first quarter of 2008, industrial production barely inched forward. Then, over the final three quarters of 2008, industrial production decreased sharply: 3.4 percent in the second quarter, 8.8 percent in the third, and 12.1 percent in the fourth. Similarly, capacity utilization, which was 81.3 percent in the third quarter of 2007, fell in each of the next five quarters to 74.9 percent at the end of 2008.
Energy goods
The PPI for crude energy materials tumbled 32.5 percent in 2008, following a 16.2-percent rise a year earlier. This downturn can be traced primarily to crude petroleum prices, which decreased 57.7 percent after having increased 51.7 percent in 2007. In addition, the natural gas index moved down 17.2 percent in 2008 subsequent to a 4.9-percent decline in the prior year. In contrast, coal prices surged 28.8 percent following a 3.2-percent advance in 2007. Further along the production chain, retreating gasoline prices led the reversals in both the intermediate and finished energy goods indexes. Prices for other refined petroleum products--jet fuel, diesel fuel, heating oil, and residual fuel--also turned down in 2008. In contrast, prices for utility natural gas climbed after having decreased in 2007. The indexes for both residential and commercial electric power moved up more in 2008 than they had a year earlier, while prices for industrial electric power rose slightly less than they had in 2007. (See table 3.)
Petroleum products. At the close of 2007, U.S. field production of crude oil was nearly flat and crude oil stocks had fallen 8.4 percent compared with the end of 2006. Supply was down to 19.0 production days from 20.6 days a year earlier. (13) In early-to-mid 2007, the Organization of Petroleum Exporting Countries (OPEC) cut output to roughly 92.5 percent of capacity. (14) As recently as the summer of 2005, OPEC had been producing at over 97 percent of capacity. The curtailments in production contributed to a 51.7-percent surge in the PPI for crude petroleum in 2007, as well as a 55.7-percent jump in the first 7 months of 2008. In response, OPEC once again boosted production to nearly 97 percent of total capacity by July 2008. The uncertain supply situation also fueled a speculative runup in prices in the crude oil futures market. Buyers of New York Mercantile Exchange crude oil contracts for delivery 3 months forward, hedging against even larger price increases, bid up futures prices from early 2007 through mid-2008. (15) After falling to $50.58 on January 18, 2007, the future price for a barrel of light, sweet crude oil steadily climbed to $78.21 by July 31 and $95.98 to close out 2007. After a brief respite to start 2008 ($88.11 on February 7), futures prices surged to a peak of $145.18 on July 14.
In mid-2008, the underlying weakness of the U.S. economy and economies across the globe began to weigh heavily on the crude oil market. In an abrupt reversal, crude petroleum prices dropped 72.8 percent in the final 5 months of 2008 to end the year 57.7 percent below their December 2007 level. Despite a 4.3-percent decline in 2008 U.S. crude oil field production, crude oil ending inventories grew 13.3 percent and supply expanded to 21.9 production days. Because of the steep drop in crude oil prices, OPEC once again curtailed production, which was just over 90 percent of capacity at the end of 2008. By that time, however, the spot price for Cushing, OK/ West Texas intermediate crude oil had tumbled by over 73 percent from its mid-July high, while the spot price for European Brent Sea crude oil decreased by more than 75 percent. The reversal in the New York Mercantile Exchange future price for crude oil was similarly sharp: the price dropped 76.7 percent from July 14 (the day of the peak price) to December 19, with a price of $33.87 per barrel on the latter date.
In addition to events in the crude oil market, the economic slowdown in the U.S. drove down prices for refined petroleum products. Data from the U.S. Energy Information Administration for "total product supplied" (16) show that total refined petroleum product consumption, at a year-over-year rate, began declining as early as mid2007. (17) The early stages of this downturn were led by lower demand for distillate fuel (heating oil and diesel) and jet fuel. By early 2008, gasoline consumption also was falling. At the close of 2008, total product supplied was down 6.5 percent for refined petroleum products as a whole, on a year-over-year basis, with gasoline, distillate fuel, and jet fuel supplied falling 3.6, 9.8, and 13.0 percent, respectively. As a result, despite lower production in 2008 and mixed data on stocks compared with a year earlier, the average price of gasoline fell 59.5 percent in the final 5 months of 2008 to close the year 51.4 percent lower than it was at the end of 2007. In a similar fashion, the indexes for heating oil, diesel fuel, jet fuel, and residual fuel all declined sharply over the last 5 months of 2008 to end the year well below 2007 levels.
Natural gas products. On a calendar-year basis, the PPI for wellhead and pipeline natural gas has moved down in each of the past 3 years. Starting in September 2007 and running through July 2008, however, wellhead and pipeline natural gas prices surged over 125 percent. The subsequent reversal in prices was similarly strong; a 50.6-percent decline to close out 2008 left the index for wellhead and pipeline natural gas 17.2 percent lower than in December 2007. (In price terms, the average dollar price per thousand cubic feet went from $5.32 in September 2007 to $10.62 in July 2008 and returned to $5.87 in December. (18)) In contrast, the indexes for utility natural gas--natural gas that is distributed to electric utilities and industrial, commercial, and residential buyers--all increased in 2008 after having fallen in 2007. Natural gas utilities also raised prices significantly in the first portion of 2008, but price reductions in the final 5 months of the year were smaller than they were in the wellhead and pipeline market. The differential between the wellhead and pipeline price changes and the utility natural gas price changes can be attributed to supply contracts between wellhead and pipeline producers and purchasing utilities, to contracts between natural gas utilities and their customers, and to regulated rates in the utility sector. These agreements influence both the timing and the magnitude of price pass-through--that is, the amount of a price increase or decrease that is passed on to a subsequent level in the supply chain--in the natural gas market.
The abrupt shifts in wellhead and pipeline natural gas prices can be traced partly to changing levels of working gas in underground storage. (19) In September 2007, working gas in underground storage was near the top of its 5-year...
|
