Stock Market Adjustment
The stock market is adjusting to weaker 2011
economic and earnings growth. Business executives,
analysts and economists have yet to reduce their 2011
estimates, So the important question is how much of the lower
growth is already discounted. The consensus had been for
double digit earnings gains in 2011. But now it appears that
earnings growth will be less than nominal GDP growth —
the low single digits.
The revised first quarter GDP deflator of 1.9% appears to be
weaker than what other measures of inflation are reporting.
It is low. Within the report the deflators for both gross domestic purchases
and the personal consumption expenditures ( PCE) rose at a 3.8% rate.
The low GDP deflator stems from the way GDP is calculated.
GDP subtracts imports from final demand to indirectly estimate
production. When you buy an imported car it is reported in PCE.
But GDP measures production, not consumption. To go from
consumption to production that imported car has to be backed out
of the data by subtracting imports. So subtracting imports is the right way
to calculate GDP.
But when import prices surge — in the last quarter they rose at a 21.8% rate —
this methodology tends to distort the GDP deflator and causes it to understate
inflation. It happens every time oil prices spike.
So the reported low 1.9% inflation rate should be taken with a grain of salt
and viewed as a data distortion.
If the inflation rate is really 3.8%, not I.9 % it strongly implies that the dominant
cause of the economic and stock market weakness is higher inflation,
not supply chain disruptions.
This analysis strongly reinforces my belief that as long as wage gains are as
weak as they are, the economy can not sustain higher inflation. If and when
inflation accelerates it generates weaker economic growth, not a self reinforcing
inflationary spiral.
Moreover, unit labor cost is now rising faster than the non-farm business deflator.
Last year strong productivity and falling labor cost meant that firms could absorb
higher commodity prices and still report strong earnings growth. That is no longer
true. Firms now need to try to pass these cost increases through and the revised first
quarter data implies that business executives, economists and analysts are still
too optimistic about firms ability to raise prices.
“that business executives, economists and analysts are still
too optimistic about firms ability to raise prices.”
A rather polite way of putting. 99% of the population has been dehydrating since 1996. 15 yrs of debt spending just to keep even and they think that a little government stimulas and TARP were going to reverse this without addressing the reason for people being what is now beyond thirsty?
Idiots!
It sounds a little strange to be talking about “inflation” when “economists…are still too optimisistic about firms ability to raise prices,” and “wage gains are as weak as they are.”
Maybe a rise in prices is not the same as “inflation.”
There are two types of price changes happening.
One is the change in relative prices such as oil and commodities, and that is rather large.
The other is the change in the overall level of prices and that is inflation. It is rather small.
But too many people confuse the two types of price changes.
spencer
yes, but
eventually the rise in prices in oil and commodities drives rises in prices in other products. you don’t get “inflation” until wages start to chase prices so that the “value of the dollar” lessens.
conceivably the price of everything could go up, and people would just have to buy less of everything. that is not inflation. at least not what inflation used to mean.
meanwhile, at least to this reader, there is some strain between your statements that “unit labor costs are rising” but “wage gains are as weak as they are.” And “high inflation” but “firms can’t raise prices.”
oh, what it is
is a shift in wealth from workers to owners. which will be temporary unless the owners can sell a lot of stuff to the chinese.
Spencer,
The question in my mind, is how much of this is related to expectations? With all the crazy talk in Washington at the Federal level, and similar talk at State levels that we need to cut spending and send more people on permanent vacation, is it really any wonder we’re seeing a slow down?
Gonna see a substantial acceleration in GDP in Q3. Restocking for auto makers and rebuilding after floods and tornadoes will put back into GDP much of what happenstance took out in Q2. Wanna do some smoothing over 2 or 3 quarters.
Stepping on my own point. the shift of wealth may happen, but it may not have much to do with rising prices.
a price rise, not inflation, would be what you would expect if resources become more scarce… either absolutely, or in cost of extraction, or in increasing demand from new buyers as an increase in “wealth” among foreigh (previously exploited) workers.
of course Harris might be correct, and we will see an intensified rate of exploitation of resources. cutting down my oak trees to “maximize the wealth” of DY’s apple orchards, or drilling for oil in the now deserted high schools of America. that should lower prices for awhile.
Wouldn’t auto restocking mostly take the form of larger auto and auto parts imports so the impact on GDP will essentially be a wash?
Yes, rebuilding storm damage should have a nice positive impact in the second half.
I am not following your thinking at all.
“But when import prices surge — in the last quarter they rose at a 21.8% rate —
this methodology tends to distort the GDP deflator and causes it to understate
inflation. It happens every time oil prices spike.”
The GDP deflator measures precisely what it is intended to measure, inflation in GDP. I’m not sure what your concern is here because we have a number of measures of inflation and their use depends on what you trying guage. If it’s how much more consumers are paying for goods and services then headline PCE will do. From a policy perspective core PCE shows inflation inertia (it’s sticky) and currently that shows very little in the way of increased inflation.
“If the inflation rate is really 3.8%, not I.9 % it strongly implies that the dominant
cause of the economic and stock market weakness is higher inflation,
not supply chain disruptions.“
It’s not difficult to see where the weakness was. It was in government consumption and investment. Government consumption and investment shrank at an annual rate of 5.1%. The remainder of the economy grew at an annual rate of 3.6% in the first quarter, not great but far better than the rate for the economy as a whole.
“This analysis strongly reinforces my belief that as long as wage gains are as
weak as they are, the economy can not sustain higher inflation. If and when
inflation accelerates it generates weaker economic growth, not a self reinforcing
inflationary spiral.“
There’s no sign of inflation in what we produce, only in what we’re importing. And even that is turning out to be ephemeral.
“Moreover, unit labor cost is now rising faster than the non-farm business deflator.
Last year strong productivity and falling labor cost meant that firms could absorb
higher commodity prices and still report strong earnings growth. That is no longer
true. Firms now need to try to pass these cost increases through and the revised first
quarter data implies that business executives, economists and analysts are still
too optimistic about firms ability to raise prices.”
I don’t believe that firms have the ability to pass through costs to the general economy. But more importantly I wonder why you think the ability of firms to increase their profit level any more is all that important. Corporate profits are healthy, and 60.2% of all growth in real GDI this recovery has gone to corporate profits. Moreover corporations are not spending money. They’re sitting on $2 trillion in cash right now, as there’s no need to invest with so much unused capacity. An increase in ULC on the other hand […]
“Yes, rebuilding storm damage should have a nice positive impact in the second half.”
And we haven’t even had the hurricane season yet! I can hardly wait. 😉
Rebuilding flood and storm danage is like insurance pay outs, the end is to restore damaged capital stock. Federal grants about the same as bailing out bankrupt insurers and exposed loses with no insurance.
Not the best stimulus but better stimulus than paying into the military industry congress complex’ no value added stimuli.
Plenty of stimuli there already, but it goes to the bond vigilantes through war spending, nothing useful or productive. Bombers and F-35’s which fail their “tests” are not capital stock!!
$690B in stimulus for the waste fraud and abuse of the Military Industrial Congress Complex in 2012, no addition to nation’s productive base.
The sovereign debt crisis in the US is War, tax cuts, tax expenditures and corporate welfare.
The crime is the Bond Vigilantes are anti New deal and want the poor to pay, because it may infringe on their war profits.
Just go where the money is and it ain’t goiong to come from Grandma’s breathing oxygen generator.
The inept war industry is “healthy” while the rest of US spending is causing the bond vigilantes who own war bonds troubles.
The scam continues.
Platinum fleece! Because of this fleecing the US is importing sneakers and jeans, much like the Russians in 1981.
Comes down to a question of how much domestic value is added to imported parts. My impression is that it’s non-negligible. Sales of imported cars don’t do much, but sales of imported parts in US built cars do lift GDP.