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Inflation Held at Bay; Industrial Output Up

Aug. 19, 2004
Consumers received some welcome relief in gasoline prices in July, encouraging them to sustain spending habits that stimulate freight movement

Consumers received some welcome relief in gasoline prices in July, encouraging them to sustain spending habits that stimulate freight movement. Energy prices have been responsible for the bulk of inflationary pressures through the year.

The consumer price index (CPI) declined a seasonally adjusted 0.1% in July, driven by the decrease in volatile gasoline prices, according to a report released by the Bureau of Labor Statistics. The index for motor fuels decreased 4%, nudging overall energy prices downward 1.9%. The food index advanced 0.3%.

July’s figures signaled a break for consumers from fattening inflationary pressures led by high energy prices which put a noticeable strain on household budgets in 2004 compared with last year. During the first seven months of 2004, the CPI rose at a 4.1% seasonally adjusted annual rate, overtaking a 1.9% increase posted during all of 2003.

The index for energy increased 25.9% in the first seven months of 2004, while in all of 2003 the index rose 6.9%.

Based on recent record-high crude prices, this break won’t carry over through August, indicated Chris Brady, president of Commercial Motor Vehicle Consulting. The New York Times on the Web today reported that crude price set a new record today, trading for over $47 per barrel.

“The biggest risk to the outlook [for freight] is the high energy prices,” Brady said. “That captures a lot of the share of household budgets, which forces them to reduce expenditures in other items. For example, if consumers spend $5 more on gasoline that could be $5 taken away from elsewhere. That reduces freight volumes for other items.”

So far there is no indication that high gas prices have cut into other expenditures as several reports indicate increasing sales in other markets. For example, department and grocery stores posted healthy revenues in July, according to a separate report on retail sales released by the Department of Commerce. See Spending Grows Moderately; Manufacturing Booms.

“As of right now it appears that the consumer really hasn’t reduced expenditures on other items to a large extent,” said Brady. “However the big question going forward is what will energy prices do to consumer spending?”

No Chinks in Industrial and Manufacturing Armor

In another report released by the Federal Reserve, industrial production increased 0.4% in July, while manufacturing production rose 0.6%. Those gains indicate that both of these sectors bounced back from a decline posted in June.

Output of consumer goods gained a modest 0.2%. Business equipment production enjoyed a healthier 1.5% rise— this marks the ninth consecutive monthly increase, underscoring the economy is still cruising on a wave of capital expenditures.

Additionally, the report also confirms that the production rate of medium- and heavy-duty trucks in July was higher than ever— at a seasonally adjusted annual rate of 350,000 per year, up from 320,000 in June.

“When there was a [economic] downturn, to conserve cash businesses put off investments. Now we’re seeing pent-up demand that is very similar to what we’re seeing now in [medium- and heavy-] truck sales,” Brady said.

For the business equipment side of production there will be more increases ahead, Brady said. “It is a sustainable increase, even with the increase in output, the backlogs are growing, which is a very good sign…Looking at the ISM manufacturing index it implies industrial production will remain strong through the second half, and therefore freight demand should be high.”

Brady also expects that a moderately increasing consumer-goods production trend will extend into the foreseeable future— as will consumer spending. “At least through the next several quarters this trend will continue because businesses are satisfying pent-up demand, while consumers have maintained their spending through increasing their debt,” Brady said. “They [consumers] pretty much maintained their spending pattern, which is unusual during a downturn. Even though personal income is steadily growing, we won’t be seeing the real strong growth in expenditures because of lack of pent-up demand and high debt levels.”

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