Pay More, Get Less
Earlier this week, we noted a deceptive rise in Retail Sales that was driven by price increases, not sales gains. Measured in Real terms, the inflation adjusted change in year over year sales actually dropped back to levels not seen since 2003.
The NYT's Floyd Norris hammers this point home today:
"FACED with tightening credit and a slowing economy, America’s consumers are being forced to scale back their purchases, but high prices of necessities are keeping their overall purchases rising at a reasonably strong rate.
The retail sales report for January showed overall retail sales that were stronger than many economists had expected, and was well received by the stock market on Wednesday, the day it was released. In total, retail sales are running more than 4 percent over the level of a year ago, an increase that is above the overall inflation rate and much stronger than the sales were when the last recession began in early 2001.
But the overall change is misleading. One reason for its strength is that prices of necessities are up sharply over the past year, meaning that those items consume more and more of the household budget, leaving less for other things.
Over all, Americans are spending about 13 percent more on food and energy now than a year ago. The figures, as are all the figures shown in the charts accompanying this article, are based on three-month moving averages of seasonally adjusted figures, and compare this year with last year." (emphasis added)
The chart below is rather telling:
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Chart courtesy of NYT>
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The actually rate of sales today is better than it was as we entered the 2001 recession. Much of that positive appearing difference, unfortunately, is inflation . . .
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Previously:
Retail Sales Show Inflation, Not Growth http://bigpicture.typepad.com/comments/2008/02/retail-sales-sh.html
Real Retail Sales Fall to 2003 Levels http://bigpicture.typepad.com/comments/2008/02/retail-sales-ga.html
Source:
Buy Less but Pay Lots More, and Get a Misleading Rise in Sales
FLOYD NORRIS
NYT, February 16, 2008
http://www.nytimes.com/2008/02/16/business/16charts.html
Saturday, February 16, 2008 | 09:09 AM | Permalink
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Barry, are you suggesting that we might want to be talking about a "core" retail sales measure. One that is ex-food and ex-energy, so that we can get a better look at business cycle trends and not commodity price movements???
Sorry, could resist.
Posted by: Karl Smith | Feb 16, 2008 9:25:57 AM
Yesterday was chores and errands day starting w/lunch at my favorite little local rester aunt. Paying my bill asked the new owner how business was going and she said slow - snowbirds are south, it's a little chilly but people are feeling a lot of pressure for disposable income (not how she said it of course)for just these reasons. In just 3 hours had the identical conversation with the barber, wine store, tobacconist and grocery store. A hint maybe ?
The real two rubs area) consumer spending has been held up by MEW/HELOC, etc. and is just now starting to tip over. And b)job "growth" - which is a lagger and also just beginning to tip over as well. Mankiw just published a link to the latest CBO forecast which is for 1.6% growth in real terms and ain't good as far as their eyes can see. NONE of these forecasts all for crossing these chasms.
NONE of the l.t. slow growth is priced into the market so far. Let alone the stumbling point risks.
Posted by: dblwyo | Feb 16, 2008 9:40:28 AM
And platinum set it's 12th consecutive high yesterday!
==========================================
With apologies to the grand poo-pah here, Larry Kudlow really went overboard yesterday.
http://www.cnbc.com/id/15840232?video=654118789&play=1
Larry railed on Eliot Spitzer at one point saying he didn't let the Wall St. firms have a trial several years ago when taking them to task for their "research". HUH?!? Given that Main St. took the hit on that confidence quake in the markets, I think the last thing any of the firms would've wanted would be a jury trial.
Then Larry said Spitzer did it to make his bid for the governorship. Spitzer said at the time he was getting involved because the SEC wasn't doing it's job. Evidently the public agreed as they elected Spitzer governor.
Strange, but it seems the people of New York like candidates who have a proven track record of fighting crime. Giuliani took on the mob, but I guess in Larry's world that was only a ploy to become mayor.
Posted by: Chief Tomahawk | Feb 16, 2008 10:01:06 AM
They are also reducing quantity without reducing the box or bag size in supermarkets. Even though the price is the same, the unit cost jumps on reduced quantity. It's one way to hide higher prices at the consumer level.
Posted by: SPECTRE of Deflation | Feb 16, 2008 10:02:44 AM
1. It's a good thing so many Americans are fat and wanting to be thin. Here's a situation that will give many of them their chance. Unfortunately, I believe they'll also have to be poorly housed and clothed.
2. Remember a couple of months ago when everybody was afraid to use the ‘R’ word? Are we there, yet?
Posted by: Marcus Aurelius | Feb 16, 2008 10:15:14 AM
World grain reserves are falling as biofuels production (ethanol) rises. I think biofuels only added to the existing trends though. The world's booming economies were bidding for food and energy.
Still, I think slashing the ethanol subsides would help us right now.
Posted by: odograph | Feb 16, 2008 10:29:14 AM
concerning prior comments about Kudlow. First I yield to no man in my dislike of him. However keep in mind with Spitzer - the only cases they "won" were cases where leaks from Spitzer's office were forcing the firms to settle. Any of his charges where they actually went to court, many of the charges were throw out by the judges or the defendants were found not guilty. By the way I am glad that he "won" those cases against the brokerage firm but the methods were despicable.
Posted by: John T | Feb 16, 2008 10:31:06 AM
Barry,
It would help futher the discussion if your definition of inflation were known.
Are rising commodity prices the result of inflation or the result of a compression of declining, remaining debt capital into a more narrow range of resources?
Or another way to put it would be can price-direction volatility, i.e., some groups rising while others are falling, actually be more symptomatic of deflation consolidation than inflation expansion?
Posted by: Winston Munn | Feb 16, 2008 10:55:38 AM
Ethanol is a fucking JOKE! Don't make me count the ways!
Everybody I know is cutting back. Speculators cut their nose off despite their face. Idiots!
Posted by: ken h | Feb 16, 2008 11:02:17 AM
The book "Blood on the Street" by Charlie Gasparino (sp?)is an eye opening recount of the poor wall street firms that some are trying to paint as "they didn't get their day in court." It is too bad they didn't get these bastards into court. They carried their criminal activities into the mortgage and debt markets, including the off-balance sheet accounting. Elliot Spitzer is an American hero.
Rising prices are a cost of the corporate, off-shore movement that never gets figured into the "mercantilist trade good for the American consumer" BS. The Bernanke dilemna is the same choice America avoided seven years ago through inflation of the bubble economy; inflate or face deflation as American jobs fled overseas. At some point, possibly now, the truth will out and the hollowed out state of the American economy will be revealed.
I fear it will take a depression before we say enough is enough. The parallels with the 1920's is eery.
Posted by: blam | Feb 16, 2008 11:44:54 AM
"Speculators cut their nose off despite their face."
That is a one of the best eggcorns I have ever seen.
Posted by: Walker | Feb 16, 2008 11:49:17 AM
"I fear it will take a depression before we say enough is enough. The parallels with the 1920's is eery."
Blam, the only differences between now and then is that we have more guns in the society and the internet exists to allow groups to communicate with each other. That should frighten any outlaw government.
Posted by: PrahaPartizan | Feb 16, 2008 11:55:15 AM
We don't need an armed uprising, a lazy and chicken shit view of the world. We need to become involved in the political process, hold our politicians to account through the vote, educate ourselves on the constitution, and demolish special interest group politics.
A much more difficult journey of personal accountability and intestinal fortitude. The Arab world is sick with "the gun is answer". Look at the extent Bin Laden has gone to try to wash his hands of his families sins.
In the words of John Lennon:
You say you want a revolution .... you can count me out.
Posted by: blam | Feb 16, 2008 12:09:10 PM
Some of us are speaking in fahrenheit and others in Celsius and I fear we won't equal out til it's 40 below.
One thing we all agree on is it is hot in the summer and cooler in the winter.
For what it's worth ($2?) it feels like stagflation. You deflationists get the stag and the inflationists get the flation. As long as the Government has a printing press, we will see Weimar before we feel Hoovervilles.
11 ounce pound of coffee. 4 pound 5 pound bags of sugar. Let's adopt the metric system and get 10 eggs in a dozen. Hedonics? Ain't goin there, brother!
Posted by: Ross | Feb 16, 2008 12:45:11 PM
ah to be young.
Posted by: rexl | Feb 16, 2008 12:47:15 PM
I noticed yesterday one of my favorite brands of bread had switched back from HFCS to sugar and honey for sweetener. I thought maybe they had noticed people were switching to other brands to get away from the HFCS, but then I wondered if maybe sugar wasn't getting relatively cheaper again.
They're also putting in flax seed and such, which is also billed as healthier, but maybe just getting cheaper compared to wheat....
Who knows, our food might get healthier as good stuff is now comparable to the cost of the crap food anyway!
Posted by: donna | Feb 16, 2008 12:56:26 PM
Ross,
I believe you are correct that it will be in commodities that the "proof of the pudding" over inflation/deflation will be found. Is it real global demand from emerging markets or are the emerging markets simply the offshore arm of U.S. manufacturing, bound to contract as U.S. consumer demand and worldwide access to debt falls?
I confess I do not know. I can only surmise. It appears to me that even the infrastructure increases in emerging markets are dependent upon trade surplus, not inherent internal economic demand.
With a contraction of trade, it seems likely commodity prices over time will fall.
If demand for commodities shrinks on a worldwide basis, it is "game over".
Posted by: Winston Munn | Feb 16, 2008 1:34:50 PM
donna: Who knows, maybe somebody soon figures out manufacturing or getting commodity work done locally also is not more expensive, after all.
Posted by: cm | Feb 16, 2008 2:16:21 PM
Winston,
I couldn't agree with you more. No one has perfect foresight but let me make a few points regarding commodities.
Infrastructure build outs are long lead time and industrial commodities intensive. Even if the so called BRIC countries slow their rate of growth, it might well be replaced by the U.S.. Our infrastructure is sorely in need of repair. If things get truely bad economically, we could see new WPA programs.
The hoarding phase in commodities including foodstuffs is just beginning. China recently forbade (essentially) the export of grain and eliminated the tax on imports.
Vietnam, China's largest coal supplier is reducing exports by over 30%. The list is long.
From my experience with the last great commodities cycle (1968-1982), there seems to be a pattern of higher highs and higher lows. Copper prices seem to be leading this pattern.
I do not know if we will be successful re-liquifing our banking system and dodging the bullet but assuming we can, that international liquidity will go somewhere. My guess and it is only a guess is that the next bubble we talk about may be a commodities bubble.
I am not a gold bug because I believe gold is only another ware, but I have been a reluctant owner from time to time. And yes, I am talking my book. I have substantial positions in sugar and palladium, both physical and equities. Cotton has all the supply demand characteristics of being undervalued. So my money is where my mouth is.
I like your observation that the emerging countries are simply the offshore arm of U.S manufacturing. Yet internal consumption in those markets is sure to follow. Typically a country produces excess for export until they 'grow into' their base. That's how we did it.
Anyway, today is an exciting time to observe the way the world works...or doesn't. I wouldn't trade my last 60+ years on this earth for any other era.
Good luck
Posted by: Ross | Feb 16, 2008 2:17:02 PM
But, Winston, will those commodities fall in value when measured against the dollar? The US strategy is to devalue the dollar. Won't that make commodities more expensive in nominal terms?
Propping up housing and spending requires dollar devaluation. True, long-term rates will likely rise and push housing lower anyway, since housing is priced on a can-I-make-the-monthly-payments? basis. But, if the government pumps in *enough* dollars, we might even get the wage inflation necessary to let house-owners continue making the payments.
But, get this: the strategy above doesn't have to *succeed* in order for us to see inflation. It only has to be *tried*.
No?
Posted by: wunsacon | Feb 16, 2008 2:21:08 PM
Ross, if I may ask, how are you playing sugar and platinum? I don't see pure-plays unless opening up a commodities account.
Posted by: wunsacon | Feb 16, 2008 2:29:11 PM
Talk about context...
JAMES STACK, PRESIDENT, STACK FINANCIAL MANAGEMENTSTACK: The Fed made two back-to-back rate cuts last month within 10 days. The last time the Fed made two discount rate cuts in 10 days, you have to step all the way back to the financial crisis of 1914. That shows how worried Ben Bernanke is about the housing bust affecting the economy right now.
KANGAS: Are we also in a recession?
STACK: All the evidence points to it. This morning's report on consumer sentiment, the big drop. But the icing on a cake in the long string of recession warning flags, for example, unemployment is up significantly from last year. There is not one instance in 50 years that unemployment has risen by this amount without the economy going into or already being in a recession. We just have to remember the Fed is always the last one to admit it.
.
Posted by: VJ | Feb 16, 2008 2:49:17 PM
Ross and Wunsacon,
Thank you both for your comments. I always appreciate the Socratic learning experience of TBP (so thanks to Barry, too, for providing the forum.)
First to Ross,
Well said. The one thing we tend to underestimate as traders is the length of time for systemic effects - the entire question of inflation/delfation will not be resolved in a month, and maybe not for even a year. The wave effect you describe will have an influence, as well, as certain world areas may support others to avoid a total collapse.
And Wunsacon, I think you, too, are exactly right. The inflation/deflation debate will not be resolved until after one or the other has occured, due to the time lag between cause and effect.
I do think it is important to understand that the Fed is battling deflation, though, and not simply responding to an economic slowdown. If the Fed wins the battle, inflation must then occur. If it loses, the effects will be felt worldwide.
The inconsistency of the entire system is at fault, though, for creating the problem.
Rather than allow markets to set rates, the "managers" must manipulate rates that causes "artificial" supply/demand imbalances. The only times the markets and the Fed are in conjuction with what rates should be happen by accident.
This is my conundrum about commodity prices. Is this real supply/demand or is this misallocation due to artificiality?
Regardless of interventions, if commodities are artificially inflated won't they revert to mean at some point?
Are the rises in commodity prices the result of economics or are they a last gasp of contracting capital, yet another misallocation that does not reflect genuine demand?
I question this, because the hard commodities reports have not been signifying shortages - if there are no shortages, then demand has to be huge. But how can demand be huge when world leverage for expansion is contracting?
Or is this simply another example of the time-delay, that prices are still reflecting previously commited-to operations, and the slowdown will be felt further out?
Posted by: Winston Munn | Feb 16, 2008 2:55:48 PM
I hadn't seen the breakouts on the inflation basket charted over such a long time. I know it's supposed to be 'notoriously noisey', but that drop in energy prices in '06 -- worse than the prior recession and extremely abrupt -- sure does stand out. No doubt we all recall the fairly good circumstantial evidence that energy prices were manipulated going into the election, but now we see how that was a 'two-fer. Kept the argument that 'inflation is low', and 'notoriously noisey energy prices' viable for another 2 years.
Clearly I'm not doing a real study, but it would be very interesting if someone did. That looks like a serious outlier, that kept the overall series average way out of wack with the real picture over the period 2002-2007.
Just a thought.
Posted by: VoiceFromTheWilderness | Feb 16, 2008 3:02:50 PM
There is no increased demand for oil or commodities other then paper demand by hedge funds. Mark ups and money flows are leading to illusion of inflation, while massive over-capacity is being built by the great bubble of non-econmic investment in China. Inflation? Wait till these commodity hedge funds meet the same fate as the mortage ones.
Posted by: Barry's Bud | Feb 16, 2008 4:26:35 PM
