Sluggish Retail Sends New Signal of Slowdown

The finished goods price index went down 0.9 percent in August after experiencing a slight 1.2 percent increase in July.  The index measures the price changes paid by businesses. The Bureau of Labor Statistics said the August downfall was the biggest since October 2006.

Consumer Spending Drops

Contrary to expectations, spending on consumer retail and food dropped by 0.3 percent in August after suffering a 0.5 decline in July.  Economists had been expecting a strong showing of 0.2 percent increase.

Joseph Brusuelas of Merk Mutual Funds said that the figures brought hope on inflationary measures but spells bad tidings for the consumers.  The reports shook the market causing stocks to tumble but recovered immediately as stocks stabilized by noon Friday.

The drop in producer prices was primarily pushed by the continued drop in energy prices.  Energy prices went down by 4.6 percent last month although the year-to-year record pegged the current prices of oil higher by 27.4 percent.  

Because the price of energy remained high, the finished goods index also was higher by 9.6 percent compared last year.  By taking out energy and food which have very volatile prices, the index registered a 0.2 percent increase in July and an all-time high increase of 3.6 percent compared to figures a year ago.

The index for pipeline inflation was also lower in August compared to July figures.  The prices of raw materials and semi processed goods, which are measures of pipeline inflation, were higher a year ago.  The volatility of the prices of pipeline goods, like the finished goods, was driven by the volatility of energy prices.  

Dean Maki of Barclays Capital said the report showed that declining energy prices was weighing down inflation.  Maki added however that inflation remains a major issue.

Fed Welcomes Declining Prices

In other developments, the monthly decline of price indices was good news for the Federal Reserve.  The Fed constantly worries about inflationary pressures but based on developments, it is expected that no significant rates changes will be implemented on its next meeting.

According to Jared Bernstein, the Fed is actually waiting for this kind of development.  Bernstein added that falling prices indicate weaker demand both at the producer and consumer level.  

Retail sales normally go up in August as families spend their back to school budgets.  But retail records show a significant drop in August spending.  Electronics retail sales fell by 1.3 percent, while spending for clothing dropped 0.3 percent.  Large department stores suffered a 1.5 percent sales drop in August while non-store retailers also dropped by 2.3 percent.

The retail sales report spells gloom for the U.S. economy as real domestic spending which has not dropped in any quarter since 1991, will continue to decline this quarter.