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Wednesday, May 13, 2015

It's All About The Chickens Now

No, really, it is all about the chickens, aka bird flu. If it jumps to pigs, we're done. As it is, it's hard to see how poultry prices won't rise for the consumer, which is going to have a depressing effect August through the end of the year.

CA drought not helping either.

The headlines on the April retail report are rather dour, but the real picture is skewed by the Easter timing.  The March report indeed was revised up, but that makes April look worse, because sales that are usually in April show up in March. These reports aren't adjusted for prices, and I think there is considerable strong-dollar effect in weaker prices, so the real picture is probably considerably better.

The actual report does show some weakness both YoY and in the rolling three-month SA. It's better to use the three-month totals in cases like this. Currently the Feb-Apr YoY is +1.5%, ex autos +0.4%. So that is not good. From the prior three months (Nov-Jan) it's -0.6%, ex autos -0.7%. But it's not like April sales just suddenly flat-lined. 

Retail is weak, and very dependent on autos which are credit-related. 

Groceries are a bit worrisome. That's what I am watching. However restaurants are doing well, which slightly offsets it. Wages are rising more slowly than expenditures on food, which, to be blunt, is never a good sign. Wages are left in the dust by costs for medicine, for example, which somewhat depresses other categories. 

So we still have a price-sensitive consumer with wary spending behaviors on anything not paid for out of credit. 

NFIB's Small Business report was somewhat encouraging yesterday. It rose after the decisive March fall; capital outlays looked encouraging and hiring looked encouraging. Sales are declining only slightly and earnings are up. Prices are constrained by reality. There is no inflationary pressure evident in the NFIB report except for wages/compensation. There is pressure there. In order to get decent employees increases are necessary (this comes through strongly), but the pricing power isn't there to compensate that well for it. 

This month's survey is one of the large-sample months, so it is more reliable. There is no sign that we are losing momentum in it - just that epic expansion is not to be expected. But that is more normal than not.

Atlanta Fed Business Inflation Expectations agree well with NFIB's employment comp crunch -  expected inflation is up to 1.9%, which would be encouraging if you are a Fed Head looking to raise rates. Two-thirds of polled firms are facing higher compensation costs, and the vast majority intend to raise prices to compensate. '

So who wins? If the chickens cooperate, inflation running about 2.3% over the course of the year. If the chickens don't cooperate, the ability to raise prices to consumers isn't there, and the strong dollar constrains export rises, so ...

Businesses are not behaving as if they expect real problems, and some of the inventory builds are just buying cheaply while they can. So I rate it continued expansion for six months.

Now those consumers!!! Those consumers may have to work a little harder, but the dollar shock should be over, the oil crunch should bottom out late second quarter or early third, and so as long as we keep buying motor vehicles, all should be well. 

I do not have a clue as to whether the motor vehicle sales will  hold up. Not a clue. I could argue it either way. The current suggestion is that the overall growth trajectory is slightly lower going into the third quarter, with second quarter being of course lifted by seasonal effects. 

I would be sure we were out of the woods, except that the fourth month freight total isn't looking too fine, and rail has shown a very slight weakening in the last month, which is not what I expected. So I am still where I landed last October - the drop in fuel prices should have enough oomph to carry us over a naturally structurally soft patch. 

And the threat to that is chickens, seriously. Nothing changes consumer behavior like difficulty covering the very basic expenses. 

ACA and higher medical deductibles do show up in economic figures. Consumers facing higher medical costs are slow the first half of the year.

Comments:
I've been cooking with a sous vide lately, and it's helped greatly to cut down on our meat expense. It makes cheap meat as good as the expensive cuts. If there were a derivative to do it, I'd short strip primal futures and go long short ribs!

ACA seems to be playing hob with small-business employment. It's spotty, though. You can hire spouses covered by employee-provided plans, all day long, at decent wages. But people who are now on Medicaid need a much larger wage to justify taking work that might throw them into the exchange plans.

I'm not sure whether that's inflationary or deflationary, or how it all washes out in the GDP, but I'm pretty sure it's a drag on the real economy.
 
When looking at retail sales one should look at wholesale sales too. As of March it isn’t a pretty picture. One more quarter of these two like this and I think the whole perception is going to go negative.

Interestingly, the labor cost index continues to charge higher. And total hours worked in the private sector continues on an upward linear path. I don’t look at labor dollars-too many moving parts. I ignore BLS job reports. At the moment I see labor improving based on the two data sets I mentioned.

The 5 year Treasure break even rate is tame but everything seems to point to around 2% inflation soon. Then what? Everybody going to rejoice that we have 2% inflation?

Nothing is clear.
 
FYI, here's a NYT article that goes into the knock-on effects of bird flu. The article doesn't contain any obviously egregious mistakes (surprising for an article about agriculture).

The flu seems to be mostly in layers at the moment, which on the one hand is understandable given the density of their housing. But on the other hand, the barns are VERY tightly protected against ingress of diseases. One wonders what the vector might be...

http://www.nytimes.com/2015/05/15/business/bird-flu-outbreak-chicken-farmers.html?ref=health&_r=1

 
Egg ranches (at least in Oregon) have to have incinerators to dispose of any chickens that die. The place I worked for liked to take the carcases out in the woods and dump them, which is why we had a coyote problem.

Sooner or later, we are going to have an epidemic from this. It will be far worse than the one responsible for the Spanish influenza outbreak as we raise livestock under terribly unhealthy conditions. Imagine this jumping from these huge egg ranches to a commercial pig operation.
 
Teri - that's what I'm wondering. It is surely possible, given the history.

And this bird flu is quite widely spread. They believe by wild fowl, but the chance that it won't make the jump to pigs eventually seems less than 50% to me. Currently we've got H5N8 plus H5N2, and the outbreak has hit
many countries.

 
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