The Fed as a Fig Leaf
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U.S. industrial production fell unexpectedly by 0.2 percent in May as output at utilities shrank, while capacity use slipped to the lowest level in almost three years, the Federal Reserve said on Tuesday.
Economists polled by Reuters were expecting a 0.1 percent rise in output at the nation's factories, utilities and mines after a 0.7 percent fall in April.
Manufacturing output was unchanged during the month after a 0.9 percent decrease in April. Utilities output dipped by 1.8 percent.
Overall industrial production is 0.1 percent below its year-earlier level.
In further evidence of the slowing economy, total industry capacity use fell to 79.4 percent, the lowest since September 2005, from 79.6 percent.
The Empire State Manufacturing Survey indicates that manufacturing activity in New York State continued to deteriorate in June. The general business conditions index fell 5 points, to -8.7. The indexes for new orders, shipments, and unfilled orders were negative and lower than their May levels. The prices paid index remained elevated, falling only slightly below last month’s record high. The prices received index rose markedly and, at 26.7, approached a record level; the future prices received index also rose sharply, reaching a record high of 47.7. Employment indexes hovered around zero. Future indexes generally improved only slightly from the relatively low levels of the past several months, although the capital expenditures index rose several points.
The region’s manufacturing sector continued to contract this month, according to firms polled for the June Business Outlook Survey. Indexes for general activity, new orders, shipments, and employment were all negative this month and registered lower readings than in May. There was an appreciable increase in the share of manufacturers reporting price pressures this month, and about one-third of the firms continued to report higher prices for their own products. The region’s manufacturing executives remained optimistic about future activity, but most future indicators fell back from their May readings.
India's inflation accelerated to a 13-year high and economists forecast higher consumer prices in China after record crude oil forced both nations to increase the regulated cost of fuel.
India's wholesale prices jumped 11.05 percent in the week to June 7, the government said today, more than the median 9.79 percent increase in a Bloomberg News survey of 18 economists. China's fuel price increase today may lift consumer prices by as much as 1 percentage point this year, a separate survey showed.
A near doubling of crude oil prices has pushed up subsidy costs and threatened to erode profits of refiners such as Indian Oil Corp., prompting governments from Indonesia to Sri Lanka to raise fuel prices. That's adding pressure on central banks to increase interest rates and cool inflation, risking growth.
``If China and India are going to continue to roll back subsidies, then clearly we have not seen a peak in inflation,'' said Joseph Tan, a strategist at Fortis Bank SA in Singapore. ``They need to tighten monetary policy, which means that growth is going to slow.''
German producer-price inflation, an early indicator of price pressures in the economy, accelerated to the fastest pace in almost two years in May on energy costs.
Prices for goods from newsprint to plastics increased 6 percent from a year earlier, the most since July 2006, the Federal Statistics Office in Wiesbaden said today. Economists expected a 5.8 percent gain, the median of 27 estimates in a Bloomberg News survey shows. Prices rose 1 percent from April.
Inflation has been pushed up by record energy and food prices, crimping consumers' spending power and clouding the outlook for economic growth across the 15-nation euro region. European Central Bank President Jean-Claude Trichet said on June 5 that the bank may increase its benchmark rate next month to rein in inflation expectations.
``The pressure in the inflation pipeline is still very high and will rise in coming months,'' said Andreas Rees, chief economist Germany at UniCredit Markets & Investment Banking in Munich. ``The ECB will point to inflation dangers to justify an interest-rate hike in July.''
Energy prices rose 15 percent from a year earlier and oil products were 25.9 percent more expensive, the statistics office said. Excluding energy, producer prices rose 2.9 percent.
Oil prices swooned after China's National Development and Reform Commission said it will hike the price of gasoline, diesel, aviation fuel and electricity.
The Chinese government lifted fuel prices by 11% in November but had kept them frozen at that level, part of an effort to avoid boosting already-high inflation rates.
Chinese gas prices are well below the levels seen in the U.S. and other nations, thanks largely to heavy subsidies. The government said it would lift some of those subsidies, effectively boosting prices by as much as 18%.
Scorching demand in China for refined crude products has been one of the biggest drivers of the global surge in crude prices. Thursday's announcement of higher prices in China sent the price of U.S.-traded crude oil falling sharply. July crude dropped $4.75 to $131.93 a barrel.
Citigroup Inc., the bank that's lost more than any other in the collapse of the mortgage market, fell in New York trading after predicting ``substantial'' additional writedowns and more losses on consumer loans.
The company, whose value has dropped by a third this year, declined 4 percent on the New York Stock Exchange after Chief Financial Officer Gary Crittenden made the forecast in a conference call with investors.
Citigroup has booked more than $42 billion of credit losses and writedowns since last year because of the credit market contraction, or about 10 percent of the $396 billion racked up by banks worldwide. Vikram Pandit, who took over as chief executive officer in December, has raised $44 billion in capital and outlined plans for the company to reduce assets by $400 billion over the next two to three years.
``We will continue to have substantial additional marks on our subprime exposure this quarter,'' Crittenden said on the call, which was sponsored by Deutsche Bank AG. ``We may continue to see the magnitude of the marks decline, as the exposures that we have have declined.''
U.S. stocks fell on Tuesday as Goldman Sachs warned that banks may need to raise an additional $65 billion, stoking worries about further fallout from the mortgage crisis.
Goldman said the global credit crisis will not peak until 2009 and lowered its price targets for 14 banking companies. It also cut 2008 earnings-per-share forecasts for 11 banks.
Whirlpool Corp (WHR.N: Quote, Profile, Research, Stock Buzz), the world's biggest appliance maker, said on Wednesday that it expects the U.S. housing downturn to extend into 2009 as many newly built homes sit waiting for buyers.
"Right now, the best guess that you can have is it (housing slump) will go through 2009," Michael Todman, president for Whirlpool North America, told the Reuters Consumer and Retail Summit in New York.
"At one point in time we thought we would see some recovery toward the end of the year," Todman said. "We don't think that now."
The U.S. average retail price for regular gasoline moved up to yet another record high. The jump of 4.3 cents was the twelfth consecutive weekly increase, bringing the price to 408.2 cents per gallon, a surge of 82.3 cents since March 24. The average price for the East Coast increased 3.3 cents to 405.2 cents per gallon. The Midwest price rose 1.5 cents to 399.7 cents per gallon. The Gulf Coast price grew 2.8 cents to 393.7 cents per gallon, once again remaining the lowest of any region. In the Rocky Mountain region, the price jumped 5.3 cents to 399.4 cents per gallon. The price rise on the West Coast was sharply higher than the other regions, surging 12.7 cents to hit 445.2 cents per gallon. The average price in California soared 15.5 cents to reach a record 458.8 cents per gallon.
Major carriers Northwest Airlines Corp. and ACE Aviation Holdings Inc.'s Air Canada on Tuesday joined the growing roster of airlines saying they plan to ground planes, reduce capacity and, in some cases, cut jobs this fall and winter. Discount carriers Virgin America Inc. and AirTran Airways, a unit of AirTran Holdings Inc., also weighed in with plans to reduce seats.
Also Tuesday, UAL Corp.'s United Airlines said its 2008 fuel bill, at current prices, will be $9.5 billion, a jump of more than $3.5 billion from last year. The carrier recently said it will cull 100 jets from its 460-plane fleet, trim capacity and cut its work force.
Even those seemingly prudent steps will lead to "significant" noncash charges in the second quarter related to impairment of assets, employee severance and the termination of contracts, United said. Those charges will swell what is expected to be a large loss for the Chicago-based airline.
As crude oil stubbornly clings to prices well above $130 a barrel, airlines of all stripes are finding many of their routes unprofitable, even as fares contime to climb incrementally. More bad news could surface Wednesday, when many airline executives are slated to speak at a Merrill Lynch global transportation conference in New York.
Flooding in the Midwest could mean drivers will be getting a bigger soaking at gasoline pumps nationwide.
In recent days, corn-based ethanol prices have risen along with floodwaters as commodities traders worry about damage to corn crops. Ethanol futures are up 17% over the past week, to $2.89 a gallon, mirroring the price of corn, which has risen 13% during the same period, according to Thomson Reuters.
Since refiners blend ethanol into gasoline, higher ethanol prices mean higher costs for refiners, which could be passed on at the pump as Americans enter the summer driving season.
"It's coming at the worst possible time," said Stephen Schork, editor of the Schork Report, a newsletter on energy.
Drivers already are paying record prices. The average price of gasoline cracked $4 a gallon for the first time earlier this month, and prices are up 36% from a year ago, according to the Energy Information Administration. (Please see related article on page A4.) Nonetheless, gasoline's rise hasn't been nearly as dramatic as crude oil's, which is up 94% over the past year.
The bigger question is the long-term impact. The Iowa Farm Bureau estimates Iowa, usually the largest corn-producing state, has already lost up to 10% of its corn crop, and a study from Ball State University in Muncie, Ind., estimates total crop damage in the state could amount to $2.7 billion.
Corn prices continue to climb on concerns about Midwestern flooding and crop damage but avoided taking out records.
Nearby July corn at the Chicago Board of Trade rose 9.75 cents to $7.4225 a bushel Tuesday. It had previously hit highs for eight straight days, most recently at $7.60 intraday on Monday.
The market shook off early assessments by some observers that a government report Monday showing 57% of the crop was rated good to excellent was bearish. That was down three percentage points from last week, but some traders expected a steeper drop, given the extent of the flooding, particularly in Iowa, the top corn-producing state.
But analysts said regardless of expectations, the report, from the Agriculture Department, paints a dire picture.
"This is the lowest-rated corn crop since 1996, the lowest-rated soybean crop since 1993," said Brian Hoops, president of Midwest Market Solutions. "That doesn't sound bearish."
Soybeans for November delivery rose as much as 13.75 cents, or 0.9 percent, to $15.6675 a bushel and last traded at $15.5125. The price rallied 2 percent yesterday. Soybeans have gained 28 percent this year and reached a record $15.865 on March 3.
``The jet stream will help to steer severe storms on the western Plains away from the flooded Midwest. However, more rain could hit the flood zones on Thursday,'' said private forecaster AccuWeather.com in State College, Pennsylvania.
About 57 percent of the corn crop was in good or excellent condition as of June 15, down from 60 percent a week earlier and 70 percent a year ago, the U.S. Department of Agriculture said June 16 in a report. About 56 percent of soybeans got the top ratings, compared with 57 percent a week earlier and 65 percent a year ago, the agency said.
The Midwest floods are raising the inflationary tide rippling through the nation's supermarkets and restaurants -- and meat prices may soon start rising along with prices for bread, eggs and breakfast cereals.
Economists are again raising their forecasts of how much food prices will climb, and for how long, because heavy rains have washed out millions of acres of prime farmland at a time when soaring demand is draining U.S. grain supplies to low levels.
"The U.S. consumer has gotten used to cheap, affordable food," said Fiona Boal, a food-industry analyst at the U.S. arm of Dutch financial firm Rabobank Group. "Now the goal posts are moving."
Ms. Boal said Monday she expects U.S. food prices to climb between 7% and 9% this year, and to continue rising in 2009. The government's Consumer Price Index for all food rose 4% in 2007 after increasing at a 2.4% annual rate during the two years before that.
Paul Prentice, president of Farm Sector Economics in Colorado Springs, Colo., Monday raised his food CPI forecasts for 2008 and 2009 by 1.5 percentage points to 7% and 7.4%, respectively.
Likewise, Michael Swanson, an economist at Wells Fargo & Co., said Monday he expects food prices to climb 5% to 7% next year, compared with his forecast for a 6% rise in food prices this year.
U.K. inflation reached the highest since at least 1997 in May, and Bank of England Governor Mervyn King predicted it will exceed 4 percent later this year, adding to speculation that the economy will fall into a recession.
The Monetary Policy Committee ``is concerned about the present and prospective period of above-target inflation,'' King wrote in a letter to the government, after the Office for National Statistics said consumer prices climbed 3.3 percent from a year earlier last month. ``The path of bank rate that will be necessary to meet the 2 percent target is uncertain.''
Policy makers ``are going to sit on their hands for the time being since there's not really much they can do for the moment,'' said George Buckley, chief U.K. economist at Deutsche Bank AG in London. ``They need to see what the economy does first.''
European inflation accelerated to the highest in 16 years last month as food and energy costs soared, intensifying what finance ministers from the world's richest nations said is becoming a ``more complicated'' dilemma.
The inflation rate in the euro area rose to 3.7 percent, the highest since June 1992, from 3.3 percent in April, the European Union's statistics office in Luxembourg said today. The rate for May is higher than the 3.6 percent estimate published on May 30.
Soaring commodity prices have pushed up costs for companies and consumers and at the same time are posing a ``serious challenge'' to economic growth, officials from the Group of Eight nations said yesterday after a meeting in Japan. European Central Bank President Jean-Claude Trichet this month said the ECB may raise its benchmark interest rate a quarter point in July, signaling he is setting aside concerns about the economy's expansion to combat inflation.
With inflation accelerating ``it becomes increasingly difficult to argue against an ECB hike in July,'' said Carsten Brzeski, an economist at ING Group in Brussels. ``However, we still believe that a July rate hike would be a one-off, mainly to flaunt the ECB's willingness to fight any second-round effects.''