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Friday, May 11, 2007

Welcome To Dried Milk Territory

Everyone was waiting for PPI and retail sales this morning. Everyone expected them to come in high; the debate was over just how high, as this Reuters roundup shows. Wachovia:
Forecast: +0.5 pct
+0.2 pct

"Another gain is expected in April, albeit at a slower pace than the past two months, with further increases in energy and food prices. Food prices, in particular, have posted four large consecutive monthly gains and are now up 7.8 percent over the past year. Demand for bio fuels is a primary culprit for the increase. Core PPI is expected to advance around 0.2 percent. If our forecast is realized, that would bring the year-over-year measure to 1.8 percent."
The temporary surge on fruits and vegetables is abating in areas with relatively low transport costs, but now the ethanol frenzy is biting the consumer.

Howard of Oraculations on gas prices:

That's what it cost me this AM for gas at the cheapest local station. I used to fill my tank it for less than $20; at the "low" my fill would cost less than $16. $[5]0 per means that $30 of weekly discretionary spending is now going to a necessity. Translate this across the economy and you have a serious recession coming our way.
Add in 7.8% on food.... "Core" inflation measures are much less important at this point than what the consumer is seeing at the store. Fuel costs act as a VAT (tax) on just about everything.

FFIEC/HUD latest median (half below, half over) household incomes by area. In most of these places, $10 extra for food and $20 extra for gas per week if you're careful. $30 after tax equals at least $40 average in wages (including EIC, etc), X 52 = 2,080 per year. Those credit cards ain't gonna get paid back any time soon!

Recent surveys showed that over 25% of Americans are underwater on their cars!

A nasty little secret is that debt is repaid on the margin, whereas this type of inflation is first dollar stuff.

Retail sales results showed an nominal drop, which, price adjusted, equates to a much higher drop in items purchased:
The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $372.0 billion, a decrease of 0.2 percent (±0.7%)* from the previous month, but up 3.2 percent (±0.7%) from April 2006.
Note that the YoY drop is less than real inflation over that period. Tell me that we're not in a recession?

PPI up 0.7% in April. Hoo-hah, sorry Charlie, game's over! Another dirty little secret; economists and politicians have no idea at all about how the average American lives.

Excellent post MOM and what can I add? The retail numbers rarely look past noting WalMart's performance to see how "ordinary Americans" are doing. Sadly, most of those vocal economists are in the employ of companies not interested in deprecating remarks about their industries in the economy.
Your remarks about "underwater" owners of autos in this country reminds me of an analysis of GM's performance starting some 3 years ago which showed some 30% of their sales were to previous owners who were falling behind on existing car payments. What do we citizens hear about this from say our Yahoo or Bloomberg Pipe? We hear that we should not buy cars because they depreciate 35% (whether it be a Ford or a Mercedes according to this lady) in first few years and that is not a good investment. Stunning Analysis. Paid for. And supported by advertising (not from environmentalists either).
About that $50 fill-up: so many other countries have been doing this for years, sprouting such teeny tiny cars, filling government coffers and not corporations...paying for health coverage and services that some 40 Million Americans cannot afford.
Keep up the good work,
I have wondered for a while about the economics of the car financing. The biggest problem is that the inital purchase loans now have terms that are too long for many people - 60-72 months! So of course they end up underwater for a good portion of that. But they keep cycling through into new purchases. A lot of dealers will add the excess onto the loan for the new car.

GAP and VSI are only going to cover so much of that. Sooner or later surely it is bound to come to an end? It's just one of many things that seem somewhat unstable in this economy.

Our very high immigrant population means that we don't even have the option of going with a European model. Even the Canadians can only sustain theirs because they won't accept low-income immigration (although they do have a good refugee policy). You can't have an open-immigration policy with an extensive welfare system. It doesn't work. We have a lot of difficult choices ahead of us.
More and more people I know are doing "Jack Benny Fillups" at the gas station, while Leading Economic Experts sound more and more like "Rejoice, Comrades! The Glorious Five-Year Plan Has Exceeded Its Quota! The Chocolate Ration of Twenty Grams has been INCREASED to Ten Grams!"

And I'm hearing the first rumblings of the return of Late Seventies-style Survivalists (TM).

I downloaded the core intermediate ppi series from the BLS. Greenspan used to use this as a measure of pipeline inflation, and the data supports this: All three of his major rate hike campaigns ('89'94,'00) persisted until it was clear pipeline inflation was trending towards zero.

Fast forward to Bernanke: seventeen rate hikes later, core intermediate ppi is still rising at a 3.6% y/y rate. This is above even the '00 peak for that measure.

Bottom line: pipeline inflation is alive and well, and the consumer will have to eventually dig deeper to meet his monthly spending budget on necessities.
Yup - that's it exactly. We aren't trending to lower inflation at all. The economic system is adapting in every way it can adapt, but the inputs are only now just breaking out.

It looks very much as if we are just beginning to move into a cycle with much higher inflation, and the only possible further adaptations are toward reduced consumption->reduced wholesale profit->reduced corporate profit->reduced employment & other cost-cutting measures including reduced domestic business investment.

In retrospect, this ethanol fling was a really BAD move. It's throwing fuel on the fire.
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