INSTANT VIEW: NY state manufacturing slumps, PPI jumps

NEW YORK (Reuters) - New York state manufacturing unexpectedly weakened in December, signaling the recent revival in the factory sector is slowing, the New York Federal Reserve said in a report on Tuesday.

The New York Fed's "Empire State" general business conditions index fell 2.55 in December from 23.51 in November.

This was the biggest monthly decline on record and the lowest reading since July 2009 when it was at minus 0.55.

The index has risen from a record low of minus 22.23 in March.

U.S. producer prices rose more than expected in November, lifted by a surge in energy costs, and recorded the first year-on-year gain since last November, according to a government report on Tuesday.

The Labor Department said the seasonally adjusted index for prices paid at the farm and factory gate jumped 1.8 percent, the largest gain in three months, following a 0.3 percent rise in October.

Compared with the same period last year, producer prices surged 2.4 percent in November, posting their first gain in a year and the largest rise since October 2008.

Core producer prices, which exclude food and energy costs, rose a larger-than-expected 0.5 percent last month after surprising markets with a 0.6 percent fall in October.

The core producer price index rose 1.2 percent measured on a year-on-year basis, versus a forecast for a 0.9 percent gain.

COMMENTS:

PAUL DALES, US ECONOMIST, CAPITAL ECONOMICS LTD, TORONTO:

"The sharp jump in U.S. producer prices is not the first real sign that the Fed's accommodative policies are stoking inflation. Admittedly, the 1.8 percent m/m increase and the leap in the annual growth rate from -1.9 percent in October to +2.4 percent are certainly eye-catching. But both are largely due to temporary energy effects. Around two thirds of the m/m gain was due to a 14.2 percent increase in gasoline prices in November. Meanwhile, the jump in the y/y rate mostly reflects the sharp falls in energy prices this time last year. PPI inflation will probably rise further in December, perhaps to around 4 percent, but these gains should prove temporary.

"Inflation hawks will also point to the fairly hefty 0.5 percent m/m gain in core (excluding energy and food) prices. However, that was just a reversal of the previous month's large 0.6 percent fall. The swing appears to have been driven by movements in the price of light trucks, which probably reflects auto makers switching from 2009 to 2010 models. Despite increasing from 0.7 percent to 1.2 percent, the annual rate remains well below the 4.2 percent seen in January.

"This downward trend in core inflation is what really matters, and it should feed into consumer prices over the course of the next 12 months.

"Admittedly, CPI inflation will also jump in November (data due tomorrow), but that, too, will be a temporary move due to energy base effects."

BURT WHITE, MANAGING DIRECTOR AND CHIEF INVESTMENT OFFICER AT LPL FINANCIAL IN BOSTON:

"Both PPI and the Empire manufacturing survey have an intertwining theme and that is increasing prices. That is the one thing the market is most fearful of.

The market has been concerned of anything that would slow it down.

The market's worried about what's going to make the Fed put the brakes on and what's going to make the Fed put the breaks on is increasing inflation. Everyone's on inflation watch.

In the Empire manufacturing survey we saw prices are beginning to increase as well as are expected to increase. PPI came in a lot higher than what people were expecting.

This is an indication that it's going to fuel a few concerns by the market that indeed inflation is starting to creep in, and that's going to build expectations the Fed will come in sooner to slow the economic recovery down faster than what this market wants."

ANNA PIRETTI, SENIOR ECONOMIST, BNP PARIBAS, NEW YORK.

"There were obviously upward surprises, strong both on headline and core... Now oil prices have declined by around 10 percent since the beginning of December, so part of the strength is likely to reverse going forward.

"The more interesting upward surprise was on core... that's somewhat unexpected. Prices of trucks were strong, and also tobacco. Tobacco is likely related to further tax increases... states are trying to increase their revenue by raising taxes.

"If you look at earlier stages of the production pipeline, they were fairly contained... but it doesn't seem that we've had a build-up of pressures along the production pipeline and that's an important sign. I think that the strength of today is unlikely to continue going forward.

"The Empire State has two measures of prices... So while input prices were up, output prices were down. That just affirms that pricing power remains very limited... although we have seen a bit of strength in the core PPI today that is not likely to filter through to consumers and therefore to the CPI."

ANNA PIRETTI, SENIOR ECONOMIST, BNP PARIBAS, NEW YORK

" was an upside surprise for the headline and for the core. I'm not so much worried about the headline, that was due to energy prices.

"If you look at the prices of raw materials, price pressures were actually very contained. That doesn't suggest that there's a real upturn in prices that would push through to the final product."

ZACH PANDL, ECONOMIST, NOMURA SECURITIES, NEW YORK

"The inflation news is already going to be going to be discounted by the market because it's just a payback from the weaker numbers last month. Excluding the increase in truck prices the core PPI would have really been unchanged on the month, so it really was just that one factor.

"We knew energy prices are up. It doesn't make much difference for the CPI tomorrow. I think today's data is pretty consistent with the story we've been telling: This is a gradual, uneven recovery, not the short bounce back we've seen after most postwar recessions."

CARY LEAHEY, ECONOMIST, DECISION ECONOMICS, NEW YORK:

"The gain in the PPI was pretty extraordinary and exceeded expectations. There was a huge jump in energy prices. The other outlier was a big increase in prices of tobacco products which increases irregularly throughout the year. This category won't be repeated next month. You are seeing a little bit