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Tuesday, June 09, 2015

Life On The Low End CONFIRMED

Update:  Note that I wrote all of the below BEFORE the JOLTS survey was released. Yes, it's real.

NFIB published its Small Business Report this morning, and it is decidedly non-recessionary and decidedly pro-inflation. Look at the actual report, pages 12 and 13. Look at the split between compensation and prices, and compensation and plans.

There is life on the low end, but it is constrained not by lack of credit, but by lack of spending power and the accumulated forces built up over many years. What businesses can afford and have expected to pay for labor often will not acquire skilled or even competent labor, and thus the business owners are in a bit of a fix. They have to raise compensation, and they have to raise prices to do it, and they are muddling through.

Nonetheless, they are making money - earnings are finally back to growth levels and finally back to expansion levels.

So we see an economy in the stages of adaptation to constraints, that IS adapting. Larger publicly traded firms are all trying to cut costs to maximize reported profits on constrained sales, while not dropping list pricing. So a lot of the growth is moving to the lower end.

The sample for this month's report is a small one. In July we get the next big sample. I always look at the number of respondents for an additional clue, because in bad economic times they go up. There is no sign of bad economic times. 

The "muddle-through" zone has been a feature of steady growth during many episodes of US economic history, but it also sets up the stage for a wage-price spiral. 

Inventories have drawn down, and that means that later in the year sales will pick up and new orders will pick up. Capital investment is low (showing up in larger company surveys as well). 

Short-term borrowing costs were 4.8%. 

If I were the Fed, I would start to raise rates in June. They must raise slowly, and they need to shock the system so that price adjustments can continue smoothly. Forget the effing stock market. Let it pee its pants and get over it. The traders have been warned.

This is a stunningly powerful inflationary engine that the Fed has created, and if they don't start to raise rates soon, they are going to be forced to pull a Volcker all too soon. If they let inflation really start humming, it is going to knock us into a recession in these circs. This economy is growing and is set up for continued growth, but it needs time to reshuffle pricing, which just can't happen overnight.

Note that BEFORE I read this report I thought that an inflationary cycle was starting, and after having read this report, I am certain.

Comments:
Hi Mom, You wanna check that link for NFIB? Doesn't seem to work.

 
Thank you very much - it is fixed.
 

Hmmm...where does the pricing power come from? How much of the increased labor cost is actually being seen in the take-home, and how much is just an increase in the tax (and regulation) wedge? In order to get a good wage spiral going, doesn't the money have to get to the employee at some point?

Mind you, I hope you're right--I'd much rather see some inflation than this constant circling of the deflationary toilet bowl.



 
This is a stunningly powerful inflationary engine that the Fed has created, and if they don't start to raise rates soon, they are going to be forced to pull a Volcker all too soon

You are dreaming. Headline inflation is NEGATIVE. Forget about your core stuff. Yeah the Fed says it looks at the core. But the Fed is never, never going to raise with headline inflation negative. Never never never.
http://www.tradingeconomics.com/united-states/inflation-cpi
 
The Fed really doesn't pay much attention to headline inflation. It pays far more attention to the PCE price index, and it looks at stuff like the sticky price index to check inflation assumptions:
http://research.stlouisfed.org/fred2/series/STICKCPIM157SFRBATL

http://research.stlouisfed.org/fred2/series/CORESTICKM679SFRBATL

http://research.stlouisfed.org/fred2/series/MEDCPIM158SFRBCLE

http://research.stlouisfed.org/fred2/series/PCETRIM12M159SFRBDAL

http://research.stlouisfed.org/fred2/series/PCEPI

Mortgage debt and consumer credit are rising. The banking environment is loose, to say the least, for business lending.
http://research.stlouisfed.org/fred2/series/DRISCFLM

Look at NIM. Banks are gonna be shoving loans out the door. THEY HAVE TO. Return on assets is one percent.
 
So this post says 'raise rates now' at the Fed level, because there's life at the low end. Last post said freight & manufacturing are indicating possible recession in 6 months. Wait, what? Are we that finely balanced on the cusp, is the signal that conflicted, or am I completely misunderstanding you??
 
Stagflation?
 
MOM
Thank you for your insight. You are one of my favorite bloggers and one of the smartest.

I understand about the capacity of inflation being available, but we have essentially followed Japan's Monterey policies and they are still fighting deflation now. I just traded my 2009 Corolla in with 45k miles. While it had plenty of life left and all I had done to it since buying it new was new tires and brakes, I did it strictly on cost reasons. The 2015 had a msrp of $20,000 and I was able to buy it for $16,200 versus paying $16,800 for the 2009 when new. But the 2015 has all the audio and cell phone controls in the steering wheel, about 4 more airbags, auto temp control AC, a new constant variable transmission (CVT) which has upgraded my mpg from 26.6 to29.9, and a USB outlet. Bottom line, a much better car at lower operating cost than the old. Plus Toyota pays for the first two years of maintenance. My example of a little deflation.

I am still in the camp that we have still not seen all the effects of the strong dollar yet. If the fed raises rates, just imagine how much stronger the dollar will get. You can't continue to raise prices in overseas markets and expect not to see volumes fall.

The us economy is destined for slow growth due to the debt levels at the federal, state, local, and individual levels. The corporations are trying as hard as they can to buy all their stock back with copious amounts of new debt. My definition of debt is increased current consumption in exchange for DECREASED futur consumption. They are making used car loans for 7 years! Virtually all my older friends have postponed retirement as their returns on savings are inadequate, and they have cut spending even mor to try to make up for cash being trash. Had they retired, they would be spending virtually all that interest income and the new workers would have their job.

I think ou current policies are to blame for the low levels of employment. We have lowered the cost of capital improvements by holding interest rates at zero, while increasing the costs of labor by raising minimum wages, skyrocketing health costs, and the regulatory burden of obamacare. Sure mcdonalds raised their pay, but how many automated order entry kiosks will be employed to cut the number of workers?

I continue to see us continually flatlining at low growth levels until a large shock such as a rate increase sends us over the edge into recession. Can't wait to see what the Supreme Court rules on obamacare subsidies.

My wife is in the software business and is struggling to hire software engineers. Her hr department just concluded a study of the Dallas Fort Worth market stating there a 12 job opening for ever qualified person available. The skills issue is a real one here in Dallas tx.

Learner2
 
Anonymous,

Keep in mind that any recent job gains have gone primarily to immigrants (They don't separate out legals from illegals.) We have a permanent pool of low wage workers. Jack up the minimum wage and they get pushed onto welfare, while more skilled workers get pushed down. No one in other party has the desire to address that.
 
I'm not sure more skilled workers get pushed down, but what does happen is the wage rates of jobs requiring more skills have to climb or you not only have a hard time attracting current candidates, it only gets worse as it discourages high school students from considering that field as a profession.

This is exactly what is happening in IT. Jobs with 3-5 years experience are paying the SAME as they did 10 years ago. People aren't going to leave secure jobs for the same money, and if the wages get stagnant, you aren't attracting new people to the field. A software engineer job with 5 years experience in a top 10 market should be paying 95K at the bottom end - if a want ad says 85-100K, experienced people will not bother. Sure the HR department will argue that surveying the want ads shows that 85-100K range is commensurate - what they won't tell you is that it is commensurate with all the other unfilled jobs. For a high school student, why study to earn $100K with 5 years experience in programming with all the associated off-hours pressures when you can earn $125K with 5 years experience as a copywriter? Of course, copywriters probably aren't competing with foreigners.
 
How can the Fed raise rates when Europe and most Asian countries are busy trying to devalue ?
Raising rates will just push more jobs overseas and pressure the remaking employers to cuts costs
however they can. Not great fot money velocity.
Sporkfed
 
corporations like to layoff older workers, because they are making more money (typically) than younger workers. When older workers lose their jobs, they are unlikely to ever get one paying anything like those wages. I call it "career deflation". It happens to a lot of us.
 
Wedding pictures: link . Yes, low rent weddings are still possible.
 
Congrats, Teri!
 
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