Vital Signs for the Week of Dec. 6


Although oil prices have pulled back sharply in the past few weeks, companies continue to face price pressures. Costs of other raw materials, such as metals and natural gas, remain expensive.

Up to now, fierce competition has kept many companies that turn raw materials and intermediate goods into finished products from passing higher material costs onto consumers. Instead, these companies have been absorbing the higher materials costs or attempting to reduce costs elsewhere.

The runups in oil and gasoline prices earlier this year, however, put higher raw material prices into the public spotlight. As a result, companies selling to retailers or directly to the public could finally find it a little easier to gain some pricing power.

A working paper co-authored by a group of five economists (Mark E. Bergen, Shantanu Dutta, Daniel Levy, Mark Ritson, and Mark Zbaracki, "Shattering the Myth of Costless Price Changes: Emerging Perspectives on Dynaic Pricing," July, 2003) has some advice for businesses that want to raise prices. How customers view a company's motivation matters. "If price changes are associated with changes in costs or with maintaining the business in response to competitive pressures," then buyers view the moves as "fair" and are more willing to pay the markup, say the authors. So companies may find more success in raising prices now since customers are well aware of higher energy and supply costs.

At the same time, the economists caution that changing prices carries more costs than many execs anticipate. By examining past academic work on pricing and anecdotal research from companies such as Procter & Gamble (PG), DHL, and Coca-Cola (KO), the economists found that managers often do a bad job adding up the expenses of changing prices. Besides the physical costs, there is a large managerial outlay. The authors say the time and effort put into analyzing data and training a sales staff can be six times greater than the physical acts of altering labels and sales books. These frequently ignored costs are a big reason why a price hike doesn't always yield a commensurate boost to profits.

Nonetheless, there are signs that businesses are indeed striving to pass along costs. According to the Labor Dept., prices of crude materials were up 15.7% in October from a year ago. That's down from the 23.7% pace in May. However, the index tracking intermediate goods -- which includes items such as cement and industrial chemicals -- has been creeping higher. The yearly pace hit 9% in October and has been rising since the 1.5% gain in March.

According to Action Economics LLC, the November core producer price index for finished goods, which excludes the volatile food and energy categories, is expected to rise by 0.2% from October. The forecasted gain would push the yearly pace of core producer prices up to 1.9%. That's not an historically rapid rate, but it's certainly higher than the yearly pace of 0.5% posted last November. And it's a modest bit of evidence that businesses are finding more opportunities to gain some pricing power.

Here's the weekly economic calendar.

MEETING OF NOTE

Tuesday, Dec. 7, 10 a.m. EST

Federal Reserve Board Governor Susan Schmidt Bies gives a speech on risk management at the 8th Annual Risk Management Forum held by the International Center for Business Information in Geneva, Switzerland.

ICSC-UBS STORE SALES

Tuesday, Dec. 7, 7:45 a.m. EST

This weekly tracking of retail sales, assembled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ending Dec. 4. In the week ended Nov. 27, seasonally adjusted sales dropped 1.5%. Over the prior week, sales rose by 0.8%, following a 0.4% dip in the week ended Nov. 13.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, Dec. 7, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the first fiscal week of December, ending Dec. 4. For the full month of November, sales were down 0.5%. Sales during the post-Thanksgiving weekend weren't as strong as expected, although the number of shoppers was up from a year ago. The latest data show that higher energy prices are taking a bite out of holiday shopping by middle- and low-income households. However, high-end or luxury purchases sales are strong.

PRODUCTIVITY AND COSTS

Tuesday, Dec. 7, 8:30 a.m. EST

The updated figures on productivity growth for the third quarter, measured as output per hour worked, are likely to show a small upward revision. Economists surveyed by Action Economics expect the revised report to show an annualized rate of 2%. The Labor Dept. originally reported productivity growth of 1.9% for the period, following a second quarter gain of 2.5%, and a 3.7% increase in the first quarter.

Third-quarter unit labor costs are expected to be revised down to an annualized increase of 1.5%. That would be a notch below the originally posted 1.6%, and less that the 1.8% gain in the second quarter.

A turnaround in the jobs market generally causes a slowdown in productivity growth. Another typical effect of tighter labor markets is higher unit labor costs. While there is still a bit of slack in the general labor market, some industries are reporting shortages of qualified job candidates. In these sectors, wages will be pushed higher. Plus, rapidly rising benefits costs may contribute to higher labor costs.

CONSUMER INSTALLMENT CREDIT

Tuesday, Dec.7, 3 p.m. EST

Consumers probably added $6 billion in debt during October. That's the consensus forecast of economists queried by Action Economics. Total credit outstanding grew by $9.8 billion in September, after a $2.2 billion gain in August, and a jump of $13.4 billion in July, the biggest monthly increase since January of 2004.

The pace of growth in consumer debt has slowed this year. Through September, installment credit has increased by a total of $66.7 billion. Through September of 2003, installment credit had grown by $70.7 billion. For the full year, 2003 debt increased by $77.9 billion, the smallest yearly gain since 1993. With auto sales softening, it's likely that the full year 2004 total will come in below 2003's. The wild card is how strong holiday sales will end up, and how much consumers choose to use credit cards during this period.

MEETING OF NOTE

Wednesday, Dec. 8, 1 p.m. EST

U.S. Trade Representative Robert Zoellick discusses East Asian integration at a Japan/Asia conference in Washington, D.C.

EARNINGS REPORTS

AutoZone, Korn Ferry International, and more.

MORTGAGE APPLICATIONS

Wednesday, Dec. 8, 7 a.m. EST

The Mortgage Bankers Association releases its tally of mortgage applications for both home buying and refinancing for the week ending Dec. 3. In the week ended Nov. 26, the purchase index edged down to 460.3, from 463.3 in the prior period, and 480.3 in the week ended Nov. 12. The latest reading of the four-week moving average slipped to 471.7, from 480.8 in the week ended Nov. 19.

The average rate on a conventional 30-year mortgage, according to HSH Associates, held at 5.83% for a second straight period over the week ended Nov. 26, from 5.85% during the week of Nov. 12.

The refi index dipped below 2000 for the first time in seven weeks, coming in at 1912.3 over the week ended Nov. 26. In the prior period, the index slowed to 2179.3, from 2375.4 in the week ended Nov. 12. The dip pushed the refi index four-week moving average down to 2153.9, from 2251.8 over the period ended Nov. 19.

MEETING OF NOTE

Thursday, Dec. 9, 8:30 a.m. EST

The Energy Information Administration releases its annual year-end U.S. economic forecast in Washington, D.C.

EARNINGS REPORTS

Thursday, Dec. 9

CIENA Corporation, Costco, and more.

JOBLESS CLAIMS

Thursday, Dec. 9, 8:30 a.m. EST

First-time claims for jobless benefits for the week ended Dec. 4 most likely eased to 335,000, according economists surveyed by Action Economics. Jobless claims bumped up to 349,000 in the week ended Nov. 27, after falling to 324,000 in the week ended Nov. 20, from 335,000 in the prior period.

The four-week moving average also moved higher, coming in at 336,500 in the latest week, from 332,300 in the week ended Nov. 20, the lowest level since late 2000. During the week of Nov. 20, continuing jobless claims fell to 2.72 million, from a downwardly revised 2.74 million in the week ended Nov. 13.

IMPORT AND EXPORT PRICES

Thursday, Dec. 9, 8:30 a.m. EST

Economists surveyed by Action Economics expect a 0.2% rise in import prices in November. In October, prices climbed 1.5%, following a 0.5 gain in September. Oil should once again be the main influence on the index. This time, the decline in crude prices should mean a more subdued gain.

Excluding petroleum, import prices were off by 0.2% in October after holding steady in September, and moving up 0.3% in August. Compared with the same month a year ago, overall import prices accelerated to a 9.7% increase, from a yearly rate of 8.1% in September. Excluding energy, the yearly rise was just 2.7% in October.

November export prices most likely rose 0.3%, following a 0.7% increase in the previous month, and a 0.4% gain in September. Compared with a year ago, export prices were up 4.5%, after 4% yearly gain in September.

Export prices for agricultural commodities posted a 1.3% decline from a year ago in October. It was the first yearly decline since June of 2002, and a dramatic reversal from the 23% yearly increase in April. Outside of agriculture, the Labor Dept. data showed additional acceleration in prices. Capital goods prices were up 1% from a year ago, and prices for industrial supplies and materials jumped 15.3% over the same period.

WHOLESALE SALES AND INVENTORIES

Thursday, Dec. 9, 10 a.m. EST

Wholesale sales should continue to expand at a respectable clip. The consensus estimate from Action Economics is for a 0.5% increase in sales for October. In September, sales improved by 0.6%, after a 1% rise during August. Compared with the same month in 2003, sales were up 14.5% in September, after a yearly pace of 14.8% in August.

After a frenetic summer, wholesalers appear to be slowing down on their inventory rebuilding. In September, inventories rose by 0.5%, after growing by more than 1% per month from May through August.

PRODUCER PRICE INDEX

Friday, Dec. 10, 8:30 a.m. EST

Producer prices for finished goods sold by U.S. businesses are expected to have slowed in November. The consensus among economists surveyed by Action Economics LLC is for a 0.2% increase. During October the index surged 1.7% due to the sharp appreciation in crude oil prices. During the month, U.S. benchmark oil prices topped $55 per barrel. However, since the Oct. 22 high, prices have retreated back below $43. Based on the November forecast, producer prices would be 4.7% higher than a year ago, after jumping to a yearly pace of 4.4% in October.

Excluding food and energy costs, core prices probably increased 0.2%. In both September and October, core producer prices grew 0.3%. Based on the November forecast, core producer prices would be up 1.9% from a year ago, after rising by 1.7% from a year ago in October.

CONSUMER SENTIMENT INDEX

Friday, Dec. 10, 10 a.m. EST

The University of Michigan's Survey Research Center will report to its initial index reading of consumer sentiment for December. Economists queried by Action Economics expect the preliminary number will come in at 93.9, after the final November reading inched up to 92.8, from 91.7 in October. Given the tepid results from the Conference Board's November consumer confidence index, the number may be lower.

The University of Michigan's survey focuses more on the financial and income conditions of its respondents, while the Conference Board gears its questions more toward the labor market. For that reason, the preliminary sentiment report may provide some further evidence about how the holiday shopping season may turn out.

The final report for November reported that consumers are still smarting from the higher energy prices, especially low-income households. If sentiment moves significantly either way, it could be an indicator on how consumers are juggling holiday shopping and higher gasoline and heating costs.

FEDERAL BUDGET

Friday, Nov. 10, 2 p.m. EST

The federal government probably registered a deficit in the second month of the 2005 fiscal year. The Treasury Dept. releases details on the government's budget for November, and economists surveyed by Action Economics expect a $52 billion deficit. In the opening month of fiscal 2005, the government rang up $57.3 billion shortfall, after closing fiscal 2004 with a $24.6 billion surplus in September.

For the full fiscal year 2004, the budget deficit soared to $412.3 billion, a record high budget deficit, after a $377.1 billion shortfall in fiscal 2003. By James Mehring


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