Washington, Jan. 15 (Bloomberg) -- Wholesale prices other than food and energy fell 0.4 percent last year, the biggest drop since at least 1973 and part of the reason companies aren't spending enough money to spur more growth in the U.S. economy. For December, the so-called core index of prices fell 0.3 percent, the Labor Department said. Including more volatile food and energy, wholesale prices paid to farms, factories, and other producers were unchanged for the month. Manufacturers including Dell Computer Corp. and General Motors Corp. have had to discount computers, cars and other goods to aid demand. The discounts can hurt corporate profit and discourage spending on equipment and factories, something Federal Reserve officials have said is needed to speed growth from about a 1.4 percent annual rate last quarter. ``Despite decent economic growth, there is no pricing power'' for companies, said Christopher Low, chief economist at FTN Financial, a division of First Tennessee Bank in New York. ``As a result, their earnings are poor and there is little business investment or hiring.''
DuPont Co. said today its fourth-quarter profit rose less than forecast as the second-largest U.S. chemical company struggled to raise prices while raw materials costs climbed. Still, economists said there's little risk of a sustained broad decline in prices, or deflation, and there are some signs the economy may speed up. Production at New York state factories expanded in January for a third month as orders kept expanding and shipments increased, the Federal Reserve Bank of New York said today. The length of time goods sit on shelves stayed close to a record low in November, a separate report showed. Companies are reluctant to let stockpiles build until growth accelerates.
Beige Book Report
Gross domestic product may expand by 2.8 percent in 2003, the third straight year with growth below 3 percent, based on the latest Blue Chip Economic Indicators poll. Growth was ``sluggish'' from mid-November through early January because of weak consumer spending and a lack of job creation, the Federal Reserve said today in its latest regional economic survey. ``Most districts characterized growth as `sluggish' or economic activity as `soft' or `subdued,''' the Fed said in its report, known as the beige book. ``Reports on consumer spending were consistently weak, with disappointing holiday sales.'' Fed officials will consider the anecdotal reports from the beige book at their next policy meeting, Jan. 28-29. ``While this PPI report may stoke deflation worries, we believe that as the manufacturing sector rebuilds depleted inventories, pricing power is likely to return,'' said Joseph LaVorgna, a senior economist at Deutsche Bank Securities Inc. in New York.
Few Deflation Risks
Excluding food and energy, the core producer price index fell 0.3 percent in December, matching November's decline. For all of last year, wholesale prices including food and energy rose 1.2 percent, compared with a 1.6 percent decline in 2001. The 0.4 percent decline in the core prices for all of 2002 was the biggest drop since the government began keeping the records in 1973. That compared with a 0.9 percent rise the previous 12 months. Higher energy and import prices make deflation unlikely, said Jade Zelnik, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. ``Chances are that producer prices will firm somewhat over coming months, especially if the economy also gradually improves,'' Zelnik said. An index of New York state manufacturing rose to 20.72 in January, the highest since the Fed bank began compiling the statistics in July 2001. A number greater than zero signals a majority of the manufacturers surveyed reported an improvement in business.
Lower Inventories
Low inventories are prompting factories to produce more to keep up with even modest demand. That signals factories are weathering the slower economy. The Commerce Department said inventories rose 0.2 percent in November and sales increased 0.3 percent. Because sales rose faster than stockpiles, the inventory- to-sales ratio held at 1.36 months. That's just above a record-low of 1.35 months' worth reached in August. Dell, the world's largest maker of personal computers, started offering in November a 10 percent discount on its hand- held computer only days after its introduction. Computer prices fell 2 percent last month, matching the previous decline and dropped 20.5 percent for the year, Labor said. The price of the vehicles automakers sold to dealers declined 2 percent for the month, Labor said. Inflation will probably stay tame as companies use discounts to revive demand. Rebates and other incentives averaged a record $3,142 a vehicle in December, according to industry figures. Incentives cost $3,814 per vehicle at General Motors and $3,521 at Ford Motor Co.
Car Prices Decline
In 2002, passenger-car prices fell 4.7 percent. That was the biggest drop since the 12 months ended in September 1960, the last year of Ford's Edsel car, a commercial failure. So far there are few signs that incentives will be reduced. ``Certainly we anticipate that the competitive market will be intense as we go into 2003,'' said James Padilla, executive vice president at Ford's North American division, in an interview with Bloomberg Television last week. ``We will be sure that our products are competitive when we go out to the marketplace, and incentives will be a big part of that.'' Energy prices rose 0.8 percent last month after falling 1.8 percent in November. Gasoline prices increased 1.6 percent after falling 9 percent the previous month. The average price of crude for February delivery on the New York Mercantile Exchange averaged $29.30 a barrel last month, up 12 percent from November. The average price was $31.90 a barrel in the first 14 days of this month.
Raw Materials
``Most of the forecasts I see don't expect any significant acceleration in inflation,'' said Alfred Broaddus, president of the Fed Bank of Richmond, in an interview this week. ``There is some concern about the increase in oil prices but I don't see people translating that into general expectations of higher inflation.'' Prices paid for raw materials rose 1.9 percent in December, the third straight increase. Those costs were 26.1 percent higher last year than in 2001. Meantime, the private group of economists that monitors the ups and downs of the economy is less inclined to say the recession that began in March 2001 is over because of a ``significant'' drop in employment in the last two months of 2002. Wall Street economists say the recession was over at the end of 2001. U.S. stocks fell after on investors' concern that some companies may make less profit than forecast. The Standard & Poor's 500 Index declined 13 points, or 1.4 percent, as of 4:31 p.m. New York time. //www.quote.bloomberg.com