"Inflation Skyrockets While Jobs Fall"

Is this a great economic program, or what?

See my website.

[Strelnikov_]

1. Sounds Like Stagflation

A blast from the past (that seventies economy).

[teryang]

2. Stagflation

The econopundits dirty little secret.

[54anickel]

27. Google the news for it. A few articles are out there, basically from

supply-side/free market/Reagan fans. Like this one: (note my sig line - the most important thing that Friedman ever said - his theory revolved around it - and it was completely ignore)

http://www.mansfieldnewsjournal.com/news/stories/20040128/localnews/306096.html
snip>
Oxley said the process began when the stagflation of the 1970s brought credibility to the free market economic theories of Milton Friedman.

"People no longer believed government had all the answers," he said.

Oxley said the idea of supply-side tax cuts and free trade first made an impact in Great Britain under Margaret Thatcher and was later adopted in the United States by President Reagan, who stayed the course during the recession of the early 1980s.

"He knew taxing and over-regulating business meant fewer jobs," Oxley said.

He said deregulation and privatization led to competition in a number of industries -- including the airline, natural gas and telephone industries. He said a Brookings Institute study showed consumers have saved 10 to 25 percent through deregulation and the proliferation of new industries.

<endsnip

Then there are these articles (among many others) from a web google on it.

http://money.cnn.com/2003/11/20/commentary/bidask/bidask/

http://www.mises.org/fullstory.asp?control=1181

[La_Serpiente]

3. What is sad about it

is that if the Democratic nominee wins the nomination, he will have to do some drastic things just to fix it.

Economic whizzes, what will the next president have to do to fix the problem? Is this was Grover Norquist wanted when he wanted to "starve the beast"?

[Frodo]

4. Your "reading" of this is entirely wrong.

Why get into the business of interpreting things you don't understand?

There is almost no correlation between the "prices paid" element of the ISM number and inflation, yet you take it as proof that STAGflation is upon us?

Don't you think it makes us look silly to just make things up? Don't you think the truth is easy enough to deal with without adding fantasy to the mix.

Newsflash! "Frodo pays 12% less for computer in 2003 than he did in 2002 - DanSpillane identifies devastating DEflation in the economy and warns of Japan-like recession in the making"

Some hints for your future travels in the word of economics. Notice how treasury prices went UP? Expect them to fall precipitously if there were signs of STAGflation.

The report also contradicts the second half of your title. An employment number of 52.9 represents slow growth, NOT job losses.

Another hint: When in the last decade was the "prices paid" number SUBSTANTIALLY higher than it is now? What was the rate of inflation that year or the year following?

[German-Lefty]

5. Deflation vs. Inflation?

I'm getting paid in EUR now. When I look at my salary in dollars, it makes me happy. A couple times this last year I've gotten a 1% raise week!

So is that falling dollar going to be accompanied by rising prices ie. inflation?

I suppose if the US is mostly a services based economy prices in that sector could stay stable, but if you're buying a CPU made in Tiawan, it should look like there is inflation (ok so hardware prices fall with of Moores Law). If you're buy gas at the pump, aren't you guys paying more now?

Is there inflation there that hasn't yet poked out its ugly head and registered on the consumer price index?

[Frodo]

6. You want the simple answer? Yes AND No.

Inflation and exchange rates really aren't the same thing - though they certainly relate. If the US saw massive inflation, you would certainly expect the dollar to fall vs. other more stable economies. Similarly, the increase in price of imported goods CAN impact overall inflation.

One factor to consider is WHERE we import goods from. Think of China (since I'm not familiar with Taiwan)... they peg their currency to the dollar, so there really IS NO change in prices for those imports.

But my point in talking about deflation was merely to point out to the poster that you can't take one tiny tiny piece of the inflation calculation (the prices some manufacturers are paying for material) and extrapolate it into terrible inflation for the overall economy.

It just doesn't work that way. There were SEVERAL months in 1994 (almost the entire YEAR) where the "prices paid" number was higher (sometimes MUCH higher) than it is now and we finished the year with 2.6% inflation and never got above 3% for a year until Clinton's last year in office. There were also several months in a row higher than this late in his term - no "stagflation"

Summary? He doesn't know what he's talking about. He just wants to promote his website.

[54anickel]

7. Your summary is a bit of a personal attack, don't you think? n/t

[Frodo]

8. Hmmm. Sorry about that Dan - Maybe I should add:

"I mean that in the best way possible"?

Always worked for my Italian relatives. :-)

I suppose I could claim that, in fact, his post shows that he does NOT understand what the report implies (the truth must be worth SOMETHING since I can't edit the post any more). And by jumping out and not only misreading the report... using it as a broad brush for the entire economy... he is inciting fear.

But that would just be piling on.

9. Tisk tisk

HUH?

First of all, those weren't MY comments, they were the figures and the comments from the linked in article! Shame on you!

Next, prices paid DOES translate into higher prices and falling margins domestically--your point about "looking back" is against a period of HIGHER dollar against imports. The opposite of now.

People SHOULD be panicked in an economy where the prices of all kinds of necessities are rising, but there is no job generation (not to mention all the borrowing going on).

And falling prices on computers IS slightly deflationary--but at least it isn't a phony deflation racket, like cars and car financing.

It seems you have tried to shoot the messenger! Me...

Dan

[Frodo]

10. Actually. No. Not at all./

They were YOUR comments. The article does not say "stagflation". You can also not ignore that this is not the only thread you posted re: this article. Your comments on the other thread leave no wiggle room that you are merely the messenger.

"Inflation Skyrockets As Jobs Fall" -- latest economic release"
Did the report say that? No.

"First firm evidence of STAGFLATION!!!!" I must have missed that in the link.

"Profit margins go AND jobs go!" Even though the economic release said the opposite


Higher prices could also translate to increased profits for suppliers. This is not uncommon when production is ramped up - manufacturers are not the only ones who get to make money. Notice that the increased number has a POSITIVE effect on the ISM index. And treasury securities went UP on the news. If they saw rampant inflation they would be tanking.


Sure, people "SHOULD be panicked in an economy where the prices of all kinds of necessities are rising" assuming the increase is substantial, but that is not the case. There is some speculation that the CPI is understating the rate of "true" inflation, but even if it's off by a factor of two we're still looking at very modest inflation numbers (right in line with the last decade - certainly not stagflation). And it's NOT off by THAT much. Other measures of inflation have come in very close to the CPI number.

In short, and to repeat, you cannot take a tiny portion of what add us to total inflation and extrapolate it as you did (and no, the article did not). You can't stay at a Motel6 for $40 and say "that was only $36 last week! That's more than 10% inflation in a week! We're going to look like Argentina! Run for your lives!"


On edit - in response to your edit. Yes, Computer prices falling does help to hold down the overall rate of inflation (is therefore "deflationary"), but notice that as one COMPONENT in the equation it does not indicate deflation in the overall economy, merely that one piece of it. Similarly, that component of manufactured goods does not imply excess inflation overall.

12. Well these things are true

I wasn't just I who said "stagflation." And I would say this really is the first firm evidence of stagflation. Along with the recent other reports which show costs going way up, and no jobs generated.

Pick another word if you like. But several people said "stagflation"

Exxon-mobil profits ARE skyrocketing. You are right, the ISM index is a good measure of inflation, since it includes prices paid.

You keep saying bonds went up. People must have not read the release in detail, or something else is going on. Like perhaps, they think the whole thing is going to go belly up in the long term, despite inflation at this point.

Meanwhile, there is a credit bubble.

Re:
"First firm evidence of STAGFLATION!!!!" I must have missed that in the link.

"Profit margins go AND jobs go!" Even though the economic release said the opposite

p.s.
Do you own stocks or bonds?

[Frodo]

13. Both.

A proper asset allocation is likely to include some of both along with real-estate and international investments. Almost regardless of age.

On edit - I "cheat" a little there. My only "real estate" investment is my house - which isn't really supposed to count. I don't understand REITs well enough to invest in them and can't afford rental properties (despite what you see on TV). I jusr count the equity in my house as a "real estate" investment. Let's just say "people with more money than Frodo" should be invested that way.

I'd say it was the first sign that inflation was about to go from 1.6% to 1.75%. NOT "stagflation", which is usually used to reflect rampant (high) inflation rates combined with negative GDP growth (or at least MUCH lower than inflation). This is NOT the situation we currently face.

"You keep saying bonds went up. People must have not read the release in detail, or something else is going on."

The "something else" might just be that you didn't understand the release? Don't you think that if that portion of the index were such a big indicator of inflation it would have a NEGATIVE impact on the overall ISM index instead of a positive one? The analyst in the link was merely saying that this might be the first signs that inflation was starting back up... Well DUH! Don't you think an 8% GDP number would have been his FIRST clue? OF COURSE inflation will eventually pick back up... Pump THIS much money into an economy and it HAS to! The question is whether it's going to go back up to 2.5% or 3.5% or maybe 4.5% and when. Your post and the replies you received are FAR from talking about the return of "manageable" (instead of "outrageously low") inflation rates... they were implying something devastating. There is no support for that position in the report, in the analysis, or in anything else "out there" right now.

"the ISM index is a good measure of inflation, since it includes prices paid"

Sorry, that isn't even close. It represents "prices paid" by one small segment of the economy... It does NOT represent the prices YOU pay for all expenditures. A "good measure of inflation" has to show SOME historical relationship to actual inflation numbers. And, as I pointed out, much HIGHER ISM "prices paid" components have NOT shown that correlation.

17. Well

Be fair then, that prices paid affects profit margins, at least, if not consumer inflation. Anti- Wal Mart effect.

And who is to say we are not headed for stronger stagflation, or terminal deflation, as a credit-induced bubble slows down?

That is the most likely scenario...stagflation, followed by credit crash.

[Frodo]

19. Not necessarily. Not even probably

In issolation, yes, of course higher raw material prices would impact profits... but this isn't IN issolation. The rest of the internal numbers in that report said orders and production are WAY up while employment (as we know) is really barely moving at all.

In THAT environment it's certainly possible to turn higher profits WITHOUT raising finished-goods prices. Your marginal cost of production can easily go DOWN if your efficiency is going up (it is), your production facility utilization is well below capacity (they are), and your employment costs are stable (obviously). EVEN if your raw materials cost goes UP.

In fact... that's what you EXPECT to happen

21. GDP was mostly vehicles

Much of this ramping up of production led to a large component of GDP growth related to...

vehicles. Check it out for yourself.

That is what is so amazing, everyone talks about the GDP numbers but it is almost ALL due to borrowing for houses and cars, of larger size.

So this leads me to my recent analysis about the car racket, and my FTC complaint.

But regardless of "what" the volume of product is, what you say means "profit margins down"...something which is closely followed.

[Frodo]

23. I just don't see how you make these "connections"

Auto sales were not remarkably changed in Q3 . They were WAY lower than the end of 2001 and we didn't see a huge surge THEN did we? How can you look at a quarter that was way out of par with recent quarters and give credit to something that was NOT way out of line?

Besides, that someone could say "take away housing and cars (and you left out the commonly added "computers) and GDP really doesn't look so good" is amazing.

It's like saying "take away oxygen and the I.V. and that patient is not doing nearly as well". This is a surprise?

"But regardless of "what" the volume of product is, what you say means "profit margins down"...something which is closely followed"

No. Sorry. Couldn't be farther from the truth. Wrong.

How many ways can I say it?

Profit margins are UP substantially throughout the economy. The S&P 500 not only reported higher profits (MUCH higher in many cases) , but very frequently higher profits than expected. How you can look at a dramatically improving manufacturing index and equate that to a declining profitability of the manufacturing sector is baffling. The whole POINT of the index is to measure the health of that sector.

24. Leading index vs. current or past

You are confusing the past with the present and future.

Prices paid for materials or services is a leading index.

If I paid for X yesterday to produce Y, I need more X to produce more Y today and tommorrow. If X costs more, the margin on Y is reduced going forward. And of course, I agree if I had inventory of X at a lower price, it temporarily boosts my profits--the current(past) case.

AS for relative contribution to GDP, it is certainly possible that vehicles have been making up the lions share of GDP all the way back to 2001. But 2001 didn't have the housing bubble money added in yet (the other big contributor).

That being the case, it makes the so-called recovery look even more narrow. And more based on credit (cars, houses...)

The employment index is also a leading one--and it is down. Hence "inflation (going forward) skyrockets, jobs (going forward) drop."

Exactly as I said.

[Frodo]

26. Sorry, no.

Calling it a "leading indicator" isn't good enough. If it IS then show me a time when it went up and inflation followed. Inflation was unchanged to DOWN substantially after the '95 spike. It was DOWN substantially after the 2000 spike. it was uniformly DOWN after the 1990 spike.

If it's a "leading indicator" then the evidence shows it indicates a DROP in inflation. Not "exactly as (you) said".

"If I paid for X yesterday to produce Y, I need more X to produce more Y today and tommorrow. If X costs more, the margin on Y is reduced going forward"

Do you read anything in the previous posts? You go wrong on your very first statement "If I paid X yesterday to PRODUCE Y". The true equation is that you pay "raw material cost" (up) plus LABOR (unchanged and therefore DOWN on a per-widget basis) plus PROPERTY PLANT AND EQUIPMENT (unchanged), etc. Since raw materials cost is the ONLY part of the equation going up, but you are producing and selling FAR MORE of your product, your cost of production PER UNIT is very likely to have gone DOWN.

You just can't say "raw materials more expensive = profit down" SURE, you don't make as much more as if you're raw materials cost was unchanged, but that is NOT the same thing as declining profits. And the proof, as they say, is in the pudding. The manufacturing secotr has shown solid INCREASE in profitability.


"The employment index is also a leading one--and it is down"

This is just more evidence that you don't know how to read that report. THE EMPLOYMENT INDEX IS NOT "down". Anything over 50 is considered an "expanding" employment component. It just isn't expanding "as fast" as last month's number. So if you choose to call that a "leading indicator" you can draw your own conclusions.

But pay attention... IN NO WAY is employment EVER a leading indicator for manufacturing. Nobody hires people BEFORE there is evidence they need them. Once again you get things precisely backwards. Unemployment CAN be a leading indicator for the housing market or GDP trends or consumer spending, but not manufacturing. In traditional economic theory employment is a coincident indicator or, in the case of a recovery, perhaps a trailing indicator.

28. Rates of increase--calculus

Calculus style

"the rate of change in employment is slower" or more simply

"the employment level in the index is down from where we thought it might be" (esp considering "blowout" GDP numbers in past two quarters).

That is not a good recipe for this point in a supposed recovery. Even John Chambers, in his Republican tones, just said that on the Cisco conference call (he mentioned employment and spending specifically as "not being where it should be in the recovery" (not exact quote)).

So there we have a rate of change in the ISM, and John Chambers -- different indicators -- saying the same thing.

On the profit things, I am not talking about profits per se, but profit margins (i.e., something which takes a lot of natural gas is likely to have margins affected by recent high prices). I agree that volumes can make up in overall profit, but certainly not all the time! People can only have so many cars in the driveway, and then there is no more room.

Margins ARE commonly looked at in the financial community. They even mentioned this on the Cisco conference call, although Cisco products have more intellectual value than commodity input. That said, even Cisco has margin concerns.

So also, calculus style

"The rate of increase of raw materials has gone up"

People want to know about the going up, but also, the RATE of the going up. Hence, words like "skyrocket" describe the rate of going up, which was appropriate for my usage. That is, a series of deltas may show a trend, as well as the actual figures.

And there are hidden dependencies which amplify rates of raw materials going up. Say, for example, the fact that US natl gas mileage is at a multi-decade low. We all use raw gas, and a lot of it. Yet, cars are part of CORE inflation, and gas is not.

[Frodo]

11. A further reply on your "looking back" point.

The dollar is STRONGER by most measurements than it was at the time. Is it asking too much for you to look before you post the assumption?

----Dollar Index Americas Europe Pacific Pac-Ex-Japan Classic
Jan 95 101.251 97.496 104.659 103.057 100.942 103.366
Dec 03 115.066 121.124 101.702 118.428 121.136 105.802

That may not format well (can anyone teach me to do a table in html???), but a summary is that by all six measurements the Dollar is currently stronger than the period in question (Jan 1995), with the exception being the "Europe" number which is a little less than 3% weaker. Certainly not enough to justify a "prices paid number of about 88 being somehow less "stagflationary" than a 75.

14. Dollar/Yen at 7 year low

The dollar is at around a seven year low.

I have NO IDEA why you are picking out 1995. It was an off year for foreign exchange--a glitch. Are you playing with me?

See here graph--it shows a dip in 94-95 but that is about it.

http://fx.sauder.ubc.ca/plot.html

It shows the dollar yen at around a 7 year low, and a much longer low, if it were not for that 95 dip which you seem to have found.

Not only that, but the last fww months start looking like a dollar crash, although not quite yet.

[Frodo]

15. Why I picked 1995

Here's the history of the ISM prices paid component for the last 15 years or so.

I picked late '94 early '95 because I eyeball that as the high point for the component. I'm trying to correlate whether there is ANY relationship to inflation when you see a high "prices" component (there isn't). I then went further to try to see what the strength of the dollar was at that time since you said the current weak dollar is somehow an explanation for why it DIDN'T cause inflation back then but WILL this time.

In short, I picked that date because it was the only one that could speak to your explanation. I did not intend to "play with you."




You can see high prices components a few times on the chart. In none of those cases did the rise indicate the coming of massive inflation.

16. Okay, now

Map the 10 year bond over the same period, and the stock market.

The bonds went down (yield up 50 percent, 5 to 7.5 94-95), and the stock market was flat or rocky.

Contrast that with now, where stocks and bonds are sky-high. In particular, are bonds 300 basis points too low?

And consider that our economy relies MORE on imports now than in previous periods...

[Frodo]

20. You assume facts not in evidence.

Bonds are 300 basis points too low? Isn't that a circular argument trying to demonstrate inflation that isn't shown?

The timeframe I linked had a WIDE range of economic conditions. What it did NOT have was a link between an increase in manufacturing prices paid and runaway inflation. I'm not sure what correlation you are making between stock/bond numbers and whether or not this is suddenly a harbringer of high inflation?

25. I was pointing out that in similar scenario

Bonds went way down in a similar year--interest rates up.

They have not done that (yet). And if they do not, the consequences seem worse.

18. Job Cuts Top 100,000 in January - Report

Job Cuts Top 100,000 in January - Report
Tuesday February 3, 12:50 pm ET

NEW YORK (Reuters) - Planned job cuts in January were 26 percent higher than in December as U.S. jobs moved to countries like India, China and the Philippines, and as mergers made some jobs redundant, according to a report on Tuesday.

http://biz.yahoo.com/rb/040203/economy_layoffs_challenger_1.html

22. There is a research paper

I was reading some formal research papers on the subject of inflation and economic trends, and the Fed. There is one that caught my eye which describes the current situation. I will dig it out later. I have to go now.

It't actually profoundly relevant, I hope I can find it again.

29. GORY details on skyrocketing inflation

The inflation index is the HIGHEST number in the ISM report (75.5). The last time it jumped like this was right before the stock market crash of 2000.

(quote from report)
"The last time the Prices Index registered higher was in March 2000, when it registered 78.7 percent"

What bond investors are thinking, I don't know! Some folks are gonna be in for a BIG surprise!

A Prices Index below 46.9 percent, over time, is generally consistent with a decrease in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. The 17 industries reporting paying higher prices in January are: Tobacco; Primary Metals; Fabricated Metals; Industrial & Commercial Equipment & Computers; Paper; Rubber & Plastic Products; Miscellaneous*; Food; Chemicals; Textiles; Furniture; Glass, Stone, & Aggregate; Electronic Components & Equipment; Transportation & Equipment; Wood & Wood Products; Instruments & Photographic Equipment; and Printing & Publishing.

Prices %Higher %Same %Lower Net Index
January 2004 54 43 3 +51 75.5
December 2003 37 58 5 +32 66.0
November 2003 33 62 5 +28 64.0
October 2003 26 65 9 +17 58.5

JANUARY 2004 ISM BUSINESS SURVEY AT A GLANCE
Series
Index Direction
Jan vs Dec Rate of Change
Jan vs Dec
PMI 63.6 Growing Faster
New Orders 71.1 Growing Slower
Production 71.1 Growing Faster
Employment 52.9 Growing Slower
Supplier Deliveries 60.4 Slowing Faster
Inventories 48.9 Contracting Slower
Customers' Inventories 40.0 Too Low Slower
>>>Prices 75.5 Increasing Faster<<<
Backlog of Orders 60.5 Growing Slower
New Export Orders 57.5 Growing Slower
Imports 59.5 Growing Faster


http://www.ism.ws/ISMReport/ROB022004.cfm

[Frodo]

30. Amazing slight of hand.

Once again you tack your own mistaken interpretation on the front of real analysis as if it supports what you are saying.

Of course no one will notice that the "prices paid" component of the ISM index is NOW the "inflation index" (interesting circular reasoning since you have been - incorrectly - trying to demonstrate ANY relationship between that component and inflation. Now it's just RENAMED to support your argument???).



"The last time it jumped like this was right before the stock market crash of 2000."

Yes? So? You see a causal relationship there? How about this one?:

"The last previous time it jumped like higher than this was right before the one of the biggest five year booms in stock market history."

Of course the 1990 jump was also before a 30% run up followed by around 8% and 10% years.


"What bond investors are thinking, I don't know! "

Oh, I don't know... maybe they think you're right about the effect on the stock market... what happened to bonds that year? Or maybe since there is no relationship at all they don't see any gloom and doom in that number.

31. NOT! (You are entertaining though)

What better indicator is there for inflation than the (input) prices paid component of the ISM?

Even if YOU won't look at this number--and insist on jabbering--the Federal Reserve DOES look at it!

Your jabbering helps me to firm my resolve and understanding; and hopefully, correct your misunderstanding.

ISM - Definition - Meaning

"More than one of the ISM sub-indexes provides insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report that helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report. "

http://www.forbes.com/finance/eventcalendar/EconomicEvent.jhtml?param_eventid=812537

btw Not that it matters, I am working on a second degree and already have one in computer science with economics study.

[Frodo]

32. Aren't you cute? Perhaps you ought to keep "working on" that degree?

Great, I've got a computer science major who thinks he's an economist. I don't suppose you use any of those skills for a living do you?

"What better indicator is there for inflation than the (input) prices paid component of the ISM?"

Oh, I don't know, perhaps the prices people pay for finished goods? Or a falling unemployment rate (not likely any time soon), or increasing labor costs (yeah right), or rapidly increasing bond yields, or increasing money supply without corresponding GDP growth? Or the CRB index, or even the PPI (a much broader, but similar number to the component you are looking at - and strangely doesn't seem to track your assumpion). Obviously the GDP deflater and CPI. You've also got the "prices paid" component of the ISM services index which is down slightly (Did I miss your "Inflation plummets!" post???).

"Even if YOU won't look at this number--and insist on jabbering--the Federal Reserve DOES look at it!"

Sure they look at it! Just not in isolation like you did. If that number were up all by itself it would be more worrisome. Right in the article you link it says "You want to watch prices paid...

even though that has a very poor correlation with inflation"

This is a LONG LONG LONG way from "Inflation Skyrockets While Jobs Fall" which, unfortunately for you is now an uneditable memorial to how much more you need to "work on" that unidentified second degree. Bev lists you as a former "voting machine test engineer" which , while mildly cryptic doesn't seem to imply an econ theory background... but hey, maybe I'm wrong.... maybe "life sciences" involves lots of upper level econ courses?



The thing is that “prices paid” really is NOT the same thing as “inflation”. You just can’t break the concept down to “price up = inflation….. price down = deflation”. If you go to Home Depot today and hammers are on sale 40% off then next week they are back to their “regular” price… the price variation is NOT massive deflation in hammers followed by massive inflation in hammers. Not all price variability can be categorized as “inflation”. An overall pricing strategy can be very different from a sustained increase in the long-term cost of a product.


Think about it this way:

Two guys (Bill and Ted)

Bill runs a widget manufacturing company (stop me if you’ve heard this one). His sole raw material need is widgetanium, a relatively rare metal only mined by one company in the area. Ted runs that widgetanium mining company.

Bill finds that production is ramping up rapidly and new orders are coming in at well above the level for the last few years. He’s got to get more widgetanium! And fast!

Phone call:

Bill: “Ted, it’s Bill, I need to up my order for widgetanium from 32 tons to 39 tons this month”

Ted: “Gee Bill, you and every other widget guy in town. I’m really getting socked in here. I’m not sure I can deliver that much”

Bill: “I’ve GOT to have it Ted. What can you do for me?”

Ted: “Well, I can dig into our backup supply and put a few of the guys on overtime. That’ll get you what you need this month. But it’s going to cost you $37/ton instead of $33/ton.”

Bill: “$37! You’ve always given me volume pricing! The more I order the less it costs me.”

Ted: “Sure, and I’ll continue to provide that pricing right up until my cost of production goes up. You guys keep this up next month and I’m going to have to buy a new digger and hire three new operators. You can count on spending $40/ton next month if things don’t ease up”.

Bill: “If that’s the way it’s got to be, that’s the way it’s got to be”


Now, is that price increase “inflation”? It certainly could be, but it isn’t necessarily. The question is: “If the demand for widgetanium goes back to normal levels next month will Ted be back to $33/ton?” Perhaps, and perhaps not. If the cycle repeats itself two years from now and the normal-volume deliveries ar priced at $34/ton and high-volume deliveries are up to $38/ton… then yes, you’ve seen inflation at work (3% over two years, not 15% to the higher price). But if the price/demand curve is the same you could see daily changes in the price of widgetanium and not actually experience ANY inflation.



If you choose to move away from refined widgetanium to the unrefined stuff and refine it yourself, your “prices paid” will go DOWN, but not because of inflation/deflation.

On edit - So look again at Bill's company. His emplyment costs aren't going up substantially (employment component), his mortgage obviously isn't changing (unless it's going down), his "Prime+" financing hasn't gone up in price, he hasn't had to expand his manufacturing capability (factories still at ~78% capacity utilization) and his workers continue to get more efficient, and demand for his product is going way up (orders component) even while his production is heading north (production component). Many of these factors are AS BIG or BIGGER components of his cost of production than raw materials are and you think he's worried about his profits? Things probably look better for him today than they have in YEARS.

So is the “prices paid” component something to watch? Certainly. And is there any way to associate it with inflation? Sure, and it’s easy to tell how. If the “prices paid” component shoots up WITHOUT an increase in orders/production/deliveries, then there isn’t a change in the demand level for the underlying materials and you ARE likely seeing an actual “inflationary” number (but only for that tiny part of total inflation you STILL couldn’t say “inflation shoots up!”.

BUT… when orders/production/deliveries are ALSO really strong numbers AND employment is not increasing rapidly in cost you should EXPECT a rise in materials pricing. Greater implied demand + assumed unchanged supply = price increase.






"More than one (notice NOT one in isolation) of the ISM sub-indexes provides insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report that helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report. "

[West Coast Democrat]

33. You never cease to amaze me at your lengthy postings

and still no gold star, I see.

35. But his wordiness makes me so dizzy...

I see stars

[Frodo]

37. lol.

Start studying economics and that will be the shortest thing you read. Your head is going to spin.

[Frodo]

36. ok

How much do you want? $10? Do I make the check out to XanthaS?

:-)


Anything in particular you care to dispute?

[West Coast Democrat]

38. Hey! In this "booming economic recovery"....

I'm sure you can afford to shell out at least $100!!

[Frodo]

40. Checks that size are going to candidates in competitive races.

You running for anything?


On edit - Ok, I exagerate... ONE check that size is going to "candidates in competitive races". But a couple half that big and a few "give up a magazine subscription" size to some old local guys.

[West Coast Democrat]

41. Surely you realize that Economics is nowhere near........

an exact science. It is a social science--there is very little right and wrong, so there's no need to get so uppity.

43. I agree

Read the article "crystal balls up" linked into my website.

You are exactly right!

[Frodo]

44. Ahh, sometimes I play too hard,

I suspect Dan can tell it's all in fun. I got a little caught up in the "Not that it matters, I am working on a second degree and already have one in computer science with economics study"

There are some here with more formal education on the topic than me (that I still disagree with on occasion) and I've never been one to put much stock in credentials (just means you can be wrong with more credibility), but this one just stuck in my craw a bit. One of my majors was "philosophy" (so I know what you mean with "not an exact science - lol), but I don't go touting my philosophy background on the 9/11 Conspiracy Theory threads. I just don't see the connection.

45. CASE IN POINT!

"In a survey in March 2001, 95% of American economists thought there would not be a recession, yet one had already started."


09/28/2002
The Economist, September 28th – October 4th, 2002
“Forecasting is always difficult, especially when it is about the future”

THE dismal scientists have a dismal record in predicting recessions. In 1929 the Harvard Economic Society reassured its subscribers days after the crash that: “A severe depression is outside the range of probability.” Despite huge improvements in data and computing power, forecasters remain in the dark. In a survey in March 2001, 95% of American economists thought there would not be a recession, yet one had already started.

Why are recessions so difficult to forecast? One excuse is that economists, unlike weathermen, do not know if it is hot or cold today because their data are always out of date. They have to forecast not only the future but also the immediate past. A less good reason is that economists have a tendency to run with the pack. Predicting a recession is unpopular (especially if you work for an investment bank), and predicting one prematurely will prove costly to clients. It may also cost you your job.

Forecasts produced by economic models with hundreds of equations are notoriously bad at predicting recessions because they tend to extrapolate the recent past. This leads to big forecasting errors near turning-points, because recessions are caused by abrupt changes in the behaviour of firms and consumers. A more reliable way to spot a coming downturn is to scrutinise indicators that have given warning signals in the past. Financial indicators have the longest lead times, but a gauge that performs well in one period may do badly in another…

Leading indicators that combine several economic and financial measures seem more promising. The index of leading economic indicators (LEI), originally produced by America's Department of Commerce and now by the privately run Conference Board, is a weighted average of indicators such as share prices, interest-rate spreads, consumer confidence and new orders. Unfortunately, the LEI failed to predict any of the past three recessions.

[Frodo]

47. Ok, so given this...

You're going to put stock in those scientists "looking at" the "prices paid" component for inflation and ignore that the last five spikes (all the data I can find) have ALL been followed by LOWER inflation and you can produce no single instance where a spike has been a precursor to an increase in inflation?


Let's look at the other end. The only noticible (though not substantial) uptick in inflation during the graphed period was from 1998-2000 where it went from ~1.5% to ~3.4% (still a good number). The jump in inflation followed on the heels of a late-1998 prices component of 32 (a strong negative peak in the index).

48. You are probably looking at crash points just like I am

"Precursor" indeed

Such a number in the ISM is not a "precursor to inflation", it is inflation.

When evidenced, such usually preceeds a stock market or bond crash, which can turn into recession and deflation. Like the similar point I found in the ISM in 2000 (inflation spike...market crash...deflation).

So if you want to call that a precursor, fine. Precursor of what...sure a period of deflation follows a crash.

A number of other crashes show such a spike--followed by "deflation",sometimes in short order.

[Frodo]

49. I know it "makes your head spin" but please read post #32

Sorry, I didn't see you had a late response in here.

"Such a number in the ISM is not a "precursor to inflation", it is inflation."

I'll point out that YOU were the one who introduced the "leading indicator" idea to the conversation. The fact that it is NOT a leading indicator does not embarrass you apparently. It just causes you to move seamlessly to "coincident indicator" (or the thing indicated itself). Slick, but not compelling. The points under discussion are your original thesis "inflation skyrockets" and "jobs fall". You can try to spin off to new points that you hope you can support, but they are still incorrect statement.

I don't see any reason to go over it again. The summary is that changes in prices ARE NOT inflation by themselves. A simple proof is that the "price component" of that index has now indicated rising prices for over 14 consecutive months. Is there an inflation problem going on right now? Was there six months ago? A year?

Any first year econ student can tell you that the problem here is "what is inflation". Well, you can be incredibly simplistic and say "any time a price goes up" which is basically what you ARE saying here. The problem with that is that your entire thread becomes bereft of content. If you look at a report that says "prices went up" and post "hey look guys! Prices went up!" you haven't added anything. But your post implies some level of analysis (we'll just ignore that you misread the report to imply a fall in employment as well and just focus on inflation - but I'll give you credit for a nice dodge).

From an economic standpoint, however, "inflation" is far less simplistic than "ug... prices go up.. grunt". inflation is essentially the state you get when the monetary supply outruns the increase in the supply of goods and services in the economy. More dollars in existence and few goods per unit of dollars = each dollar worth a little less than it was. And while the prices one subset of "producers" pay is certainly a factor (as are several numbers that have gone DOWN) it drives nothing by itself.

In a larger sense, of course, you always WANT to have SOME inflation because DEflation can be a lot more devastating. So when you talk about inflation as if it's a problem you HAVE to be talking about something greater than 2-3% (say, anything under around 4%), PARTICULARLY if you are going to go on to mention stagflation. 4.8% or 5.4% (as under BushI) is a concern, depending on the rate of GDP growth 7,8,10,12% like in the late 70's early 80's IS a problem. You have done nothing to demonstrate that we have even gotten out of the lowest end of that "target" range. We are almost as close to deflation right now (and plenty of people here were crying that we had hit THAT just a few months ago) as we are to any "real" inflation. Greenspan has had us right around the "sweet spot" in inflation for around a dozen years now and your "sometimes leading, sometimes coincident, sometimes nothing but-I-still-think-it's-a-big-deal 'indicator'" has been all over the map since then... with no noticeble impact one way or the other.

50. Changes and deltas shows trends, and as such is a leading indicator

The actual value, and any sequence of deltas between monthly values in the ISM inflation index (or other indicators), which have an uptrend and are increasing in delta, provides both a coincident and leading (predictive-trend) view.

So therefore, my statement is correct. BTW, the unemployment rate tends to trail much more than the ISM employment index, which is more focused.

A "skyrocketing" is a description of the correctly identified trend, which is good for public consumption.

Besides, today's jobs report CONFIRMS the manufacturing jobs drop part....

Sorry for the confusion. It's beyond high-school math.

Dan
BTW the unemployment rate has gone up for minorities.

[Frodo]

51. Circular reasoning AND redundancy? lol.

What an efficient post!

So "changes" AND "deltas" huh? Dazzle me with more of that econo-banter Danny.

And now a "change" IS a "leading indicator" eh?

And we're back to calling it the ISM "inflation index" again. Strange that I can't seem to find that term in any textbooks. It doesn't even come up on google. Shall I speculate where you got it from? Not if I want this post to stay on the thread. :-)

So therefore, my statement is correct. if only wishing made it so... I'd be a millionaire. BTW, the unemployment rate tends to trail much more than the ISM employment index, which is more focused.

Really? I thought the ISM index (and all components) were based on a survey of manufacturers and the employment question was "did you employ a higher,lower, or the same number of employees last month as the month before?" interesting how that becomes "trailing" anything (though if you're going to run the gamut from "leading" to "trailing" you had to fit it in here somewhere - you're bound to be right eventually). The truth is that neither one "lags" the other. One merely measures (and much less accurately) a small subset of the other. Whether one leads the other is entirely a function of where manufacturing employment falls into the "recovery". You can have (HAVE had) manufacturing WAY behind general employment, or , in most recoveries, they lead. It isn't a function of the index.



BTW the unemployment rate has gone up for minorities.
Yes, and that sucks, AND it makes the argument that Bush has been worse for the minority/inner-city communities than for the population as a whole and mutes any supposed trend away from the Democratic party. What it DOESN'T do is make your point for you. If you're going to look at that report for one sub-component you force me to point out the main number which has fallen several months in a row. I don't put much stock in that high-level number, but I admit it is politically more powerful than others... but if YOU are going to bring it up?


Besides, today's jobs report CONFIRMS the manufacturing jobs drop part....
The index/report you cited DID NOT say what you made it out to say. Remember again that they measure different things.
" An Employment Index above 48 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The eight industries reporting growth in employment..." That doesn't force "more manufacturing jobs" it just means "more manufacturing sectors reporting increased employment" - not really the same thing. 37 straight months of declining employment components and only four (?) to the upside since then doesn not force every monthly employment report to show positive numbers... but is CERTAINLY does not say what you stated.

52. We appreciate your typing, but

I can see you have weak math background. That's okay with me, it is in general a problem in the US.

I don't bother reading all your message content, but thanks for the effort.

I would appreciate your response as to why new retail jobs normally reported in December are showing up in January. But please, spare the wordiness. A simple explation will do.

Like "they moved those jobs from December to make January look better"???(not necessarily the explanation)

[Frodo]

53. A simple answer? Thhhhttpd!!!

on edit -

(Or whatever Bill the Cat used to do.) :-)

I suspect I have just a few (dozen) more credits of math than you do, but I ain't going down the credentials road. Frankly, I've probably got more programming that you do too.
I saw your post on the other thread and it didn't make any more sense than you have so far. (Except the "I don't get this". I thought that was particularly clever - though "I smell a stinky" was not up to your normal reparte'. Answer to your question? They aren't.

Those numbers are seasonally adjusted, so nothing in either December OR January is reflective of seasonal hiring (besides, most seasonal hiring for Xmas falls into the November numbers). You see that the gain was "retail" and assume it must be holiday hiring. It's really just that the retail/services sectors have advanced a bit faster than manufacturing. Surely you applied your crystal ball to the all-time record high ISM Services index??? (probably missed the "inflation index" in there falling slightly)

Slow readers can skip to this point

Retail is just doing better on a relative basis. Seasonally adjusted figures explain away any other explanation.

54. Here's the answer

The normal hiring in December for retail was somehow reported in January, which gave the actual number more impact, considering normal seasonal adjustment. The normal number was clearly not there in December.

Eureka!

[Frodo]

55. What could you possibly have to back that up?

Sheer baloney!

I assume you're just saying they were lying. Fine, I don't trust them either. But why would they artificially take numebrs away from the LAST report and force themselves to show 1,000 new jobs when they coulf have shown seventy times as much?

Put a LITTLE thought into it, please???

56. Based on seasonal weightings

It should be pretty obvious, given the dominance of the retail figure in January.

I am not going to tutor you on seasonal weightings.

[Frodo]

57. Buddy, you ain't "tutoring" on anything.

Just ten minutes ago you "didn't get it" now you're ready to teach the subject? You NEVER cease to entertain! If you ever decide to teach economics PLEASE go public first and let me know. I want to short your stock!

"Seasonal weighting" means that retail organizations would have to hire MORE THAN the normal number of employees they would otherwise hire for Xmas. You can have a negative Nov/Dec retail hiring number and actually be hiring tens of thousands of people. Showing a positive number means you hired MORE than that. A flat december number just means retail employement went up the normal amount for that month.

Perhaps January normally shows a runoff in retail and this positive number actually reflects just losing fewer than normal jobs. They aren't necessarily "real" jobs.

The "dominance" of the retail figure? 70k is frankly not very "dominant" it's just better than losing 10k or gaining 20k. So it sticks out this month because nobody else did very well or very poorly. That doesn't mean there is anything unusual or hidden about it.

The number probably means just what it says.

Don't change your major.

58. TUTORING lesson: 70/112 = more than half

In math, dominant is usually considered more than half of something.

Deductive proof:

112/2 = 56

70 >> 56 (The little ">>" means "much greater than")

Hence, 70k retail jobs out of 112k represents a dominant proportion, since it is more than half (56).

[Frodo]

59. Good luck with that.

You seem to love hyperbole. "Dominant" is not the same thing as "small number slightly larger than smaller number". It implies something impressive... something out of the ordinary. You as much as state that by assuming the variation MEANS something. It's such a small variation from previous months that it probably just means that one sector outperformed another on a reletive basis.

The Nasdaq "dominated" the Dow today. Does it mean ANYTHING to you other than tech stocks were a bit more attractive today? Does it HAVE to mean that tech CEO's have secretly been hiding good news to fool us later?


Try to answer the question: WHY!?!?

Last month the report showed 1,000 net jobs. If they really had 70k new retail jobs that they were hiding... why would they do it? Last month's report would have come in OVER expectations, but they show a piddly 1,000.

Don't play with the tiny variations. 5.6% or 5.7% unemployment is not enough to get your panties in a wad over.

[seasat]

60. Jumping in the middle here

It does seem that the spike in retail jobs in Jan. is related to the seasonal adjustment if I read this part of the BLS report correctly.

Link to BLS summary

Retail trade employment increased by 76,000 over the month, after seasonal adjustment. The industry had lost a total of 67,000 jobs in November and December. Weak holiday hiring in general merchandise, sporting goods, and miscellaneous stores meant that there were fewer workers to lay off in January,resulting in seasonally adjusted employment gains for the month. Building
material and garden supply stores added 14,000 jobs, reflecting continued strength in the housing market, and food stores also added 14,000 jobs.

It sounds like to me that the seasonal adjustment resulted in an underestimate in Jobs in Nov/Dec and an overestimate this month. They readjusted the December numbers up to 16,000 in this release. I'd bet that they adjust January's figures down next month.

IMHO, the reason for the jobs report is not great news. I think one of the big reasons for a dip in unemployment is mainly due to about 375,000 people losing unemployment benefits this month and simply dropping out of the work search or taking whatever job they can get just to get by.

They've also got an very good defence of why the establishment report is so much better than the household survey in the explanatory report.

BLS Explanatory Report

61. Thanks!

Assume that the retail number is screwy.

Consider then, the number ex-retail was 112-76 = 36k

Consider that the construction and retail gains are tied to loose credit--still, months into the recovery.

I will post a research paper on here if I can find it. One aspect of it fits the current US situation perfectly, and has interesting implications.

What is going on here has an exact model in the past, according to a certain analysis by an economics professor. It is not random nor some kind of delay, but rather a new version of an old serious problem.

[Frodo]

62. Hmmm

Weak holiday hiring in general merchandise, sporting goods, and miscellaneous stores meant that there were fewer workers to lay off in January,resulting in seasonally adjusted employment gains for the month.


Sounds a little like: Perhaps January normally shows a runoff in retail and this positive number actually reflects just losing fewer than normal jobs. They aren't necessarily "real" jobs. ??

That's the purpose of a "seasonal" adjustment. You're supposed to ignore what month it is. Discussions about "oh that's a really big 'first-time filer' number for unemployment and in December when they should be HIRING, not FIRING!" (we saw some of this in late November), are really meaningless. Because the "they should be hiring" is already figured into the number.

You don't add a "mental" seasonal figure ("they should be laying off retail employees) on top of an already adjust number. Just deal with the straight number - This month is better than last month which was worse than the month before.

It's like the people here who look at the 350k/week "newly unemployed" and say "That's 1.4Million laid off this month and only 100k new jobs!?!?!?" without realizing that as a "net" figure, the 100k new jobs really means 1.5Million people starting "new jobs" this month.

[seasat]

63. I'm not insunuating that Shrub is cooking these stats.

"It's like the people here who look at the 350k/week "newly unemployed" and say "That's 1.4Million laid off this month and only 100k new jobs!?!?!?" without realizing that as a "net" figure, the 100k new jobs really means 1.5Million people starting "new jobs" this month."

If you read the explanatory note, you'll see that they adjust the seasonal adjustment for the preceding 3 months for the establishment survey based on the data. You can't assume that each year is going to follow the exact same pattern of hiring and this "recovery" is behaving much differently from the previous ones regarding employemeement. The reason that I find the current number so bad is that they will probably adjust these numbers further down since the hiring and firing patterns for the Christmas retail workers didn't follow the usual pattern. That appears to me why they included that note about the seasonal adjustment in this report.

[On the Road]

34. A Spike in Producer Prices Could be Serious

or the increases could be absorbed by profit margins and turn out to be temporary. It's a volitile indicator, so two or three months would be a better indication.

But more importantly, I don't see a spike like that in the official numbers here:

http://www.bls.gov/ppi/home.htm

You mentioned that the numbers were implied in the article you cited, but I couldn't see where they implied or how to derive them. Here are the December numbers from BLS:

-----------------------------------

Commodity Data:

Finished goods
+0.3%(p) in Dec 2003

Finished core
-0.1%(p) in Dec 2003

Intermediate goods
+0.5%(p) in Dec 2003

Intermediate core
+0.1%(p) in Dec 2003

Crude goods
+2.0%(p) in Dec 2003

Crude core
+3.4%(p) in Dec 2003

All commodities
+0.4%(p) in Dec 2003

Industrial commodities
+0.5%(p) in Dec 2003

Passenger cars
+0.2%(p) in Dec 2003

Light trucks
-1.7%(p) in Dec 2003

Gasoline
+5.1%(p) in Dec 2003

Pharmaceutical preparations
+0.2%(p) in Dec 2003

Softwood lumber
-0.3%(p) in Dec 2003

Electronic components and accessories
-0.4%(p) in Dec 2003

Industry Data:

Hospitals
+0.1%(p) in Dec 2003

Grocery stores
+0.4%(p) in Dec 2003

Property and casualty insurance
unchanged in Dec 2003

Personnel supply services
unchanged in Dec 2003

Hotels and motels
-0.1%(p) in Dec 2003

Trucking, except local
-0.1%(p) in Dec 2003

Wireless telecommunications
+0.3%(p) in Dec 2003

39. (deleted)

[54anickel]

46. There has been a bit of chatter on Wall Street regarding inflation

http://www.quicken.com/investments/news_center/story/?story=NewsStory/dowJones/20040202/ON200402021044000610.var&column=P0DST

snip>
Economic activity in the manufacturing sector grew in January for the eighth consecutive month, according to the Institute for Supply Management business survey, whose headline number rose to 63.6, short of the 64 economists had expected. Numbers above 50 indicate expansion in the sector.

The prices-paid component of the index jumped to 75.5 from 66, raising the possibility that inflationary pressures are imminent. Signs of inflation could prompt the Federal Reserve to begin raising interest rates, making it more expensive for businesses and individuals to borrow money and effectively tapping the brakes on the economic expansion.
endsnip>

And regionally
http://www.coloradoan.com/news/stories/20040203/business/341016.html
The monthly survey by the Omaha, Neb., university relies on data from supply managers and business leaders in the three states. A reading above 50 indicates growth.

The business conditions index in January was a robust 61.1, virtually unchanged from December's 61.3. Knudsen also said the confidence index, which tracks survey participants' economic outlook six to nine months out, rose to 83.5 percent -- its highest level since the survey began a decade ago.

However, the prices-paid index rose to 75.8, a sign of potential trouble. The index tracks prices paid for raw materials and supplies bought by businesses in the region.

"This is the fourth straight month that the inflation gauge has risen," Knudsen said. "As a result of somewhat higher inflationary pressures recorded in our regional survey and in national surveys, I expect the Fed to begin raising rates as early as its May meeting."

42. BLS data, et. al

The purchasing manager report is more timely, and is done by the ISM, who I linked in.

I wrote a whole piece on my website about problems with the CPI and PPI--by the BLS. I even think the capital goods part of the PPI may suffer from the "car racket" cycle I filed a complaint with the FTC about, like the CPI.

Nevertheless, crude and intermediate jumps in the BLS data of 2-4 percent are significant, and I think your list above left some of them out, but is still representative.

It's not merely that there are pricing pressures, but pricing pressures without job generation--and so much was bought on credit recently.

64. Move discussion to THIS thread...

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=114&topic_id=5520