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Tuesday, June 14, 2011

NFIB And The Rest

In terms of the moving parts of our current economy, NFIB will assume more importance. The June report, which covers the May survey, shows what is happening to small businesses. The online summary covers the important parts - the effect on services, inflating cost trends that show a breadth of cost increases still transiting through the US economy, and weak sales.
Consumer spending is weak, especially for “services,” a sector dominated by small businesses. the index makes clear that optimism is moving in the wrong direction: a recession-level reading for an economy fighting its way through a recovery. Also, inflation is a growing concern now with 1 in 10 citing this as their most serious business problem meaning cost side pressures coming in the “back door,” not rising food prices at home.
Hiring intentions in this report forecast continuing rises in unemployment stats over the summer.

Any time you see falling sales and continuing price increases, you know that the consumer will continue to experience pressure. NFIB thinks that core prices are doomed to continue to rise, with a diffusion from base price increases into services and end-user products that are not commodity-based.

So we have rising price trends, poor profit trends (somewhat mitigated by higher prices out of necessity), poor sales trends, and remarkably poor employment trends. Some may call this stagflation; that is the most positive possible way to describe the situation.

Small business owners are being forced to raise compensation (because many had had to cut, and higher costs for employees are really cutting into the real wages of employees). This is the famous wage/price spiral the talking heads tell us isn't going to happen:
For those reporting lower earnings compared to the previous three months, 50 percent cited weaker sales, 2 percent blamed rising labor costs, 13 percent higher materials costs, 2 percent higher insurance costs, and 7 percent blamed lower selling prices. Seven percent blamed higher taxes and regulatory costs. As for employee compensation, 6 percent reported reduced worker compensation and 16 percent reported gains yielding a seasonally adjusted net 9 percent reporting higher worker compensation, unchanged from April and the second strongest reading since the fourth quarter of 2008. A seasonally adjusted net 7 percent plan to raise compensation, also unchanged from April.
I track plans versus actual, and this is a notable diversion. As for inflation:
The “feedstock” for inflation continued to grow, with the number of owners actually raising average selling prices reaching a net 15 percent, seasonally adjusted. Thirty-one (31) percent reported raising average selling prices, double the percent cutting prices which suggests that average price levels will be rising, and that is “inflation.” The Federal Reserve protests the notion that QE2 liquidity is driving commodity prices as liquidity scours the world to find a higher return than that offered by banks, but there is a strong correlation between Federal Reserve purchases and commodity prices.
I also expect renewed cost pressures from consumer product imports over the summer. This report should be read in conjunction with NACM's May survey:
The bottom seemed to drop out of the economic recovery in May. The first signs of trouble started to manifest in the April, but by the end of May these threats had become very real and the economy took some steps backwards.
...
The index of favorable factors had been as high as 64.1 just three months ago in February. Now that index has fallen to levels not seen since October of last year. The index shows that there is still some growth in terms of credit applications and that bodes well for the future assuming that conditions improve and the rate of approvals starts to grow again. Right now there is still a sense that conditions will improve as the threat of inflation fades, but if the threat continues to advance there is likely to be another wave of negative responses.
Mark, your hour has come!

I am certain that services to consumers are the most pressured part of the economy currently, with very significant sales drops as many consumers find themselves short every month. Eventually, income must balance outgo. For those consumers who haven't yet grasped this concept and are trying to run up their credit cards, the big credit card issuers have redoubled their risk checks and are once again cutting credit limits if the pattern of charging looks like it is induced by fiscal stress. So don't expect help from that quarter.

For what it is worth, SuperDoc's appointments have shown a 35% falloff over about six weeks. I had warned him in the beginning of April that we were heading into another contraction, but I didn't expect this steep an effect and when I put out feelers to check, indeed I found very similar reports from service businesses around the country. It was so depressing that I terminated the effort and just sullenly waited for NFIB, but now I am glad I did, because it showed me where the primary weakness was.

NACM suggested that retail sales in June would not be very good. May's already dropped, but it was centered in motor vehicles. Note that this is a nominal drop which will get worse when deflated. April's gain was revised down. They are trying to put the happy face on this one, but I don't think retailers are going to be smiling. It is important to remember that retail sales are one chunk of consumer spending, and services are another.

Given the combination of dropping nominal retail sales in May and the bad service indicators, May's net real consumer spending appears to have been negative, which is why I found the happy talk Bloomberg article linked above somewhat mystifying. Look at the string of negatives in the first table at this link, and tell me how that's a sign of further growth? Either I have gone crazy or the people espousing this point of view have; somebody's barking mad. Supermarkets are cutting food prices where they can, which is why sales dropped at the supermarket. But - listen up, folks - when food prices drop and people don't buy more, the average consumer is under severe financial stress.

Producer Prices - The 12 month finished rate is +7.3, up from +6.8 in April. Intermediate 12 month is +10.3, up from +9.4 in April. Raw is +22.8 down from +23.7 in April. Clearly businesses have some catching up to do, or perhaps crude prices have some considerable collapsing to do. This pricing system is not even close to balance, and you can expect price increases across the economy or, if that cannot happen, the economic trends to continue to worsen. Staring at grocery spending makes me think it's going to show up in economic trends.

Business inventories are due at 10:00. I will now go off and see if anyone comments that I am frothing at the mouth. If not, then I think the people seeing positive trends in the economic reports are probably the ones with economic rabies syndrome.

Comments:
I'm honestly shocked that we've managed to get wage inflation going. I'd guess that will end, though, if Congress doesn't extend unemployment benefits again.
 
Well, businesses did cut both employees and wages. Every business that isn't going bankrupt has some "key" employees, and that effect is magnified in small businesses.

The situation of many lower income workers gets somewhat dire when you have the types of cost increases we have had. They are having trouble buying bread and gas.

I should have thrown in the towel on this one about three weeks ago when I noticed a supermarket in a pretty decent area (high levels of homeownership, median wage well above national average, pretty good employment stats) advertising cheap BREAD. They had it on a board in the parking lot and on big signs posted in the windows.

The bread was really cheap. $1.50 a loaf and below, but they had cut the sizes of the loaves somewhat.

So this explains why so many people think we are going into a depression.
 
I'm thinking of buying a food truck. The original plan was to serve semi-gourment offerings at premium prices. Perhaps we should go with homestyle menu at lower prices.
 
I'm not so certain wage increases are going to happen
actually. My guess is that employees that are getting
raises are being asked to do more. Will the productivity
increase be passed through to the employee ? Probably
not. They will however, pay more for less health insurance
and other reduced benefits. If wage inflation doesn't keep
up with the cost of living we are just falling behind more
slowly.

Sporkfed
 
Spork - yes, but probably most now are doing just that.

Small businesses are looking to cut costs any way they can. When your customers are very tight on cash, your options are limited.

On the other hand, when your employees can't afford to drive to work....
 
Gordon - I'd go with filling and cheap, but tasty. Something you can serve fast that's affordable.
 
MoM,
Are they actual wage increases or higher insurance costs
and payroll taxes that are increasing labor costs ?
Sporkfed
 
"Mark, your hour has come!"

My Hour Has Come (Musical Tribute)
 
NFIB report bad, but not as bad as expected. Result: Market jumps - but on extremely low volume. We will see if there is any conviction behind the rally in a few days.

Sub headline - pundits predict that China will have a soft landing from the recent monetary tightening. Extrapolation is that the inflationary pressures from China are over.

Whee, happy days are just around the corner! Yes, and I have some view swampland for sale - very cheap!
 
hi there, just some anecdotal observations, but where i live (the midwest) government employees at the federal level i'm acquainted with are doing quite nicely (received just under a double digit raise. and the state/local ones i know are doing very well too. i know some retiring young (after 20 years, so in their mid 40's) and collecting on their pension and working in new fields. others leaving to go work for the companies they helped pick and that the local government is hiring to provide some of the new health-care services with the changing laws. anyway, around here, the teachers, fire, police and general government employees are the ones doing very well, both on the books (and off). if you're looking for the wage inflation, you might want to check the northern government union states. it's written into many of the labor agreements, so i've always known if the government wanted wage inflation they could get it just from their own employees. and right now, if you're not selling to them, you don't stand a chance. they're the only ones with increasing cash flow and they're bulletproof (taxes just went up again), so they're a better credit risk-generally because they're never fired. i read in the labor report that somewhere some state and local government employees have been fired, i'd like to say i believe that, but i don't. when that happens here, they're just re-hired somewhere else. financially, they'll take down everything else here before they'll feel the pinch. i just hope i can stay ahead, and only bug-out before this place implodes like detroit...

my word verfication...calksonu...sure seems that way sometimes :)
thank you for all the information and insight you share... anon
 
Gordon - spuds. Lots and lots of spuds.
 
Looks like it might be better to locate near the government buildings rather than in the shadow of the office towers, too.
 
Hey Gordon, think "Potato Champion". They have a very successful food truck in Portland OR. They do fries, served in a paper cone. They come with gourmet ketchup. They also sell Canadian style, with curds. Prices seems a bit high for fries, but they do good business. Can you find someone tattooed to be your help?
 
You can survive on potatoes!

That and fruit trees. Nothing else has enough calories besides rice and beans.

Potato is guud ja?
Venn zee fuud maney runs low, potato ist king.
 
Anon MW - the conventional wisdom seems to be that municipalities are laying off tons of workers, but the actual data doesn't support that. I think most of it is retirements.

If you look at JOLTS, and look at the table for layoffs and discharges here, you'll see that in April ex Fed numbers were lower than a year ago. So while separations are increasing, they appear mostly to be from retirements. The same was true in the previous release.

I think the cost of paying retirement benefits is squeezing non-federal governments, so I think they are less likely to replace retirees. Job openings for state and local governments are still slightly higher than those of a year ago, so some of these workers will be replaced.

And you are right about the compensation.
 
The only local gov layoffs I've heard of have been in janitorial/building maint areas. The only real local gov cost cutting is in shorter work weeks, very few are actually losing their positions.
 
Yeah the janitors are the first to go. That's because they are the only people that really DO anything there!
 
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