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Friday, April 13, 2007

PPI And Public Policy

PPI (Producer Price Index) for March has been released. (See PPI index here if you want another format.) I don't normally write about this release, but today I am doing so to support my statements in the last post about constraints on consumer expenditures and the real drop in consumer spending on basics like groceries. (I really don't make this stuff up.) When the government releases the retail report, it does not price adjust, so to figure out the meaning of the numbers you have to do it for yourself.

The annualized rate of cost increase for finished foods for the quarter ended in March was 18.7.

The annualized rate of cost increase for "finished" energy goods for the quarter ended in March was 9.4.

Contrast that to the annualized rate of cost increase for finished goods less food and energy, which was 2.3.

It should be obvious that for the lower 60% of income households, these numbers dictate either increased borrowing or decreased spending. For the lower 30%, this represents a dire hit. My adjustment on groceries is going up to 8.1% annually for the next quarter. Before it was at 7.8%.

The cost of elitish lala environmentalism is lethal for the lower echelon of American households and it is not doing much for the environment either. A workable energy policy would offset this trend, but instead of doing that we launched into subsidized ethanol programs, which will substantially increase the cost of the most basic foods for consumers.

Is this good public policy? Should the welfare of American farmers really be more of a concern to the American taxpayer than the welfare of the average consumer shopping for dinner? Darn it! It's very kind of the American taxpayer to pay us like this for our corn field, but have you spent your money well?

These are the effects of this exercise in feel-good environmentalism:
The end cost to consumers on food is not as high as the index shows above, because grocery stores switch to lower cost brands and cut their profit margins to compensate. But prices for "need" items required for daily living are escalating rapidly for consumers, and the cost for transportation to get those goods to the point of sale is not helping matters. Farming and stock are also energy intensive businesses.

Watch for additional mergers, buyouts and acquisitions in grocery chains. For industries that actually make basic need items and sell them to consumers, these numbers foretell a rough year in which profits will be squeezed For industries that sell discretionary items to consumers, these numbers foretell a rough year in which total sales are likely to fall.

I would also recommend watching the NACM CMI (Credit Managers' Index). March was not good for either services or manufacturing. Combined dollar collections fell 7.8%, which is a record drop. Accounts turned over to collections have gone below 50, which signals a contraction (for this one component only). The services sector is much larger than manufacturing and had been expanding while manufacturing looked weaker. Now it is following manufacturing on a slow downward trajectory.

Both of the CMI indices are still in positive territory, but compare YoY:
Manufacturing March 2006: 56.1
Manufacturing March 2007: 54.6

Services March 2006: 60.1
Services March 2007: 55.4

Combined March 2006: 58.1
Combined March 2007: 55.0

The trajectory for Combined:
01 2007: 57.2
02 2007: 56.6
03 2007: 55.0

In general, a weaker dollar is favorable for manufacturing. However, when input costs rise sharply and when quite a bit of the inputs are imported, the effect is diminished or perhaps even entirely negated for import-dependent industries.

What does "finished energy goods" mean? I'm guessing products that are sold for their energy content, like gasoline and electricity?
Yes. Gas, diesel, fuel oil, propane, etc.
Thanks. It certainly seems that the corn-ethanol push has increased prices for finished food goods, but I don't see how it has done so for finished energy goods, with a possible minor exception for natural gas (which is used in ethanol plants, but quantities are probably too low to swing the overall NG market much)

One thing that could help a lot, from several standpoints, is getting rid of the ridiculous $.55/gal import tariff on cane-based ethanol. Energy balance of sugarcane ethanol is much better than that of the corn-based stuff.
Thanks, MOM. I always enjoy reading your posts, esp. those on the economy, and your comments at CR's blog.
David, that's correct. We could lower the cost of fuel by having invested in other types of energy production domestically, such as nuclear/other sustainable/oil/gas fields, but instead we haven't. We chose to go the subsidized ethanol route. I believe it was political pandering justified by airhead environmentalism. I'm all for environmentalism, but not for stupid environmentalism.

Thus we are being beat hard on import fuel costs, which is raising inflation. That's bad policy which hurts domestic mfrg. The ethanol only exists because of the subsidies, and like I say, it's a bizarre public policy. The price gap between foreign and domestic oil is quite high.

Jed, glad to read it!
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