| PPI shows little signs of price rises in pipeline |
|
|
|
|
|
Jon
Preferred Member
Cash: $ 50.02
Posts: 193
Joined: 13 Apr 2005
|
| PPI shows little signs of price rises in pipeline |
 |
|
Prices received by farms, factories, refineries and mines held flat in June, well below the 0.4% gain expected. After the 0.6% drop in May this was confirmation of very modest pricing pressure. The core, excluding food (-1.1%) and energy (+2%), fell 0.1% as it posted the first decline in four months. The core fell as auto prices declined due to the �me too� employee pricing helped the dealers as well.
The decline in prices reached even further back in the pipeline as crude goods slumped 3.3%. Intermediate goods edged higher 0.1%, but core intermediate goods declined.
Combined with the flat CPI (core +0.1%) reported Thursday, it appears prices are well contained after a bout with inflation early in the year. As discussed Thursday, the dip in economic activity and consumption during Q1, though transient, was enough to help supply close the gap on demand and alleviate much of that pricing pressure.
Capacity utilization climbs to a 4.5 year high and production jumps as well.
Of course the Fed does not view supply in the same way it works in the real world. The Fed worries about bottlenecks and if demand is holding up because no matter how much it talks about free markets it still believes in the Phillips Curve view that too much prosperity automatically leads to inflation.
Thus we view the climb in capacity utilization to 80% (79.6% expected), the strongest showing since an 80.3% reading in May 2000 (that was back before the economy collapsed) as a real positive because it shows the supply side ramping up production to meet and get ahead of demand. That is what keeps inflation at bay, i.e. a supply side with the incentives to really produce, create and invent. In that way it makes the products consumers know they want, it creates new technologies the consumers don�t even know they want yet, and at the same time those creations improve supply productivity as suppliers use the devices they create.
Same thing with industrial production. It posted a 0.9% gain, well ahead of the 0.4% expected and May�s 0.3%. The more production, the more supply meets demand and the less inflationary pressures. Unfortunately production is still fairly meek with just a 2.1% year/year rise in Q2, the smallest increase since Q2 2003.
Thus there is still work to do in order to get suppliers producing more. As seen in the employment figures, suppliers are still loathe to really ramp up production and accumulate large inventories once more when the Fed is in a rate hiking mode. Everyone remembers what happened the last time the Fed raised rates during a period when suppliers were in full production mode, meeting the tremendous demand of a rapidly expanding economy. Then the Fed dried up the money supply and sent rates to the choke point and that is exactly what the market and then the economy did.
With that still fresh in their minds there is no way producers are going to stretch past the comfort level, and thus fully meet demand. That leaves the economy in the incredibly ironic situation of having the Fed raise rates in order to fight off inflation, but by doing this it is facilitating the very thing that causes inflation, i.e. supply lagging demand. With the Fed raising rates companies are refusing to get into positions where they could be seriously hurt with an inventory overhang if the Fed goes too far as it does 80% of the time.
Business inventories rise just 0.1% in May but the focus is on the wrong inventories.
That was the smallest gain since September 2004 and much of it was related to auto values sitting on lots declining by 0.6%. Still it shows that inventories are not running higher to meet demand. Most of the articles we have read and the economists we hear speak are discuss only autos with respect to inventories and how auto manufacturers and dealers needed to reduce bloated inventories. Well there is a reason inventories are bloated. Auto makers can shut down their plants, but if they do they still have to pay 80% of the wages the would if they were operating. What they do instead is keep them running to generate more product they can sell even if they have to sell it at a reduced price. Thus, auto inventories are hardly a representative part of business inventories as they are artificially high due to the outdated labor contracts the automakers have to live by.
Outside of autos, inventories have been thin. As stated, companies are not going to get caught in that same vice they were in back in 2000 and 2001 when the Fed torpedoed the economy and hundreds of billions of dollars worth of inventories had to be written off quarter after quarter. Remember each CSCO conference call each quarter? The big issue was just how much inventory remained to be written off. With that ongoing there was no way the price would stop falling.
The survivors of that black hole are not going to be caught in that position again and thus the lower inventory levels across the board. It pervades even to the consumer level. Gone into a Home Depot since that bust? You are lucky if you can find half of what you need in stock. I spend more time looking up at the overhead shelves to see if they have what I need up there than I do looking in the lower racks. Amazon.com is having similar issues. One order I placed in May was not filled for over two months and then I received the �sorry but it ain�t happening� email.
The point is the one made above: businesses know what can happen when the Fed is fighting inflation that not many are seeing anywhere, not even under the rocks. When you fight a shadow you never can beat it until the thing causing the shadow is gone (i.e., the light). If you are fighting inflation you think is there simply because the economy is growing at a good clip (even though no one can really see it), you are not going to beat it until the thing you think is causing it is not longer there. In this case it would be an economy expanding at 3.9% in the last quarter. Companies know that and they are going to err on the side of caution as opposed to leaving their necks out for the Fed to step on.
Thus the Fed�s well know track record with respect to fighting inflation is helping exacerbate the inflation it thinks it sees. Companies are not going to really get creative and ramp up production across the board as long as the Fed is fighting inflation. Thus supply will remain tight even as demand remands strong, and that is the textbook cause of inflation: more demand dollars chasing a low supply of goods and services.
We offer a FREE two week trial stock tradingnews letter . stock trading. Check out our online stock seminars. Financial Seminars.
|
Tue Jul 19, 2005 2:49 am |
|
|
|
