Pressure to lower prices…
Across the Curve has a post about pressure to lower prices… The culprit is the weakness of labor’s income to bolster prices. So now many companies are maneuvering to do whatever to cut prices. The last half of 2013 made this clear. Yet, some companies are not going to be successful at this game. These “cost-cutting challenged” companies are hiding in the woodwork… and they will progressively infect economic growth.
The effective demand limit is biting down on the economy. More so if wage cuts or restricted hiring are part of the aggregate package to cut costs. The seeds of a coming contraction are being sown.
quotes from the post…
“American companies are struggling with falling prices for a number of their key products, keeping a lid on revenue growth and hiring.”
“Corporate revenues are showing the strain, whether from lower prices, weak demand or a combination of the two.”
“Part of the problem is that weak revenue leads companies to cut prices to boost sales, which reduces the value of those sales, and trickles down through the supply chain.”
““When you have such weak top-line growth, such weak demand, the competitive environment becomes much tougher,” says Jason DeSena Trennert, chief investment strategist with Strategas Research Partners.”
This type of tight competitive environment for profits indicates the effective demand limit. When the economy is below the limit, profits can rise for most companies, but at the limit, profits get crowded out. Such that if one company gains profits, another company is losing profits. Price cutting is a reaction, especially when supply is so much more potent than demand.
I wonder how many economists under their breath are concerned about the unemployment rate.
“Part of the problem is that weak revenue leads companies to cut prices to boost sales, which reduces the value of those sales, and trickles down through the supply chain.”
This isn’t just theoretical. In my professional life, I worked at a top-of-the-food chain company, and the cost-cutting pressure on suppliers was brutal. We drove some into bankruptcy.
Another down side of an excessive focus on cost cutting is that product development and product quality become afterthoughts, if they’re even given that much consideration.
And have you noticed in retail shopping a decrease in brands for various items, and variety selections? Another symptom of general economic contraction.
this surprised me:
http://research.stlouisfed.org/fred2/graph/?graph_id=158039&category_id=0
those are the three deflators for PCE…prices for durable goods shown in blue fell every month this year and have been falling pretty steadily since the mid 1990s
This is not at all surprising to most of us – in fact , probably 99% of us.
once again, if lower prices clear the market, lower the price. it isn’t going to “go down the supply chain”. The truth is, there is little reason to move prices in a stable environment.
your just the worst “economic” intellectual I have ever seen. Just clueless about capital markets.
Low costs, competition, and productivity are good for producers and consumers. We want “lean and mean” firms, and want lower prices.
Of course, a $15 minimum wage won’t stop firms from becoming “lean and mean,” and the higher wage will reduce other production costs, e.g. the extensive and enormous costs of turnover.
Moreover, real wages for low income workers will rise more than real wages for high income workers will fall, through higher prices (note, the Fed has been trying to inflate the economy, because raising nominal growth raises real growth).
A $15 minimum wage will not only give a raise to minimum wage workers, it’ll give a raise to all workers earning between the minimum wage and $15 an hour, and will likely raise wages for workers earning over $15 an hour, perhaps up to $25 an hour.
The (positive) income and multiplier effects may be stronger than the (negative) employment effect, up to a $15 national minimum wage, and the minimum wage can be higher in some parts of the country.
However, we also need to deregulate some of the $2 trillion a year in federal regulations, which are generally regressive, raise prices, lower real wages, and have yet to be absorbed in the economy, along with removing and reducing some state regulations. Furthermore, reducing tax rates for the “middle class” will boost consumption, output, and employment to raise tax revenue.
The higher minimum wage can allow all workers to pay some income taxes, to make fiscal policy more effective, i.e. raising tax rates when economic growth is strong and reducing tax rates when economic growth is weak, to more effectively achieve a more sustainable growth rate. Economic boom/bust cycles are inefficient both in the boom and bust phases, because of periods of strain and slack.
Also, I may add, profit is the result of efficiencies in the (competitive) free market. Every firm should maximize profit. Well managed firms should win and poorly managed firms should lose.
Firms should maximize profits (legally, of course, and on a level playing field) whether the minimum wage is $7.25 or $15.