Thursday, August 21, 2008
leading indicators dive; profit margins being crushed
The Conference Board's index of leading indicators fell 0.7 percent in July, more than triple the drop forecast by economists surveyed by Bloomberg News. Separate reports showed the number of Americans collecting unemployment insurance remained near a five- year high last week and manufacturing in the Philadelphia region shrank for a ninth straight month.
``The economy has really shown one sign after another of weakening,'' Martin Feldstein, a Harvard University economist, said in a Bloomberg Television interview in Jackson Hole, Wyoming, where he's attending an annual Federal Reserve conference. Feldstein said he is ``much more pessimistic than a year ago'' about the outlook.
see the LEI chart here. (UPDATE: going further back, via barry ritholtz.)
it isn't hard to understand how the leading indicators could be getting beat down. kevin depew refocuses away from the headline PPI number to examine what the underlying components are saying.
In today's PPI report, the Finished Goods PPI was up 1.2%. The Intermediate Goods PPI was up 2.7%. The Crude Goods PPI was up 4.2%. What does this mean? Think about it for a moment.
If the prices you receive for your finished goods are rising at 1.2% month-over-month, while the prices for intermediate and crude goods are rising at a faster level - as they have been for almost six consecutive years now - then that means you are finding it difficult to pass through price increases to your customers.
that's a chart of profit destruction, and demonstrates how corporate incomes are contracting more severely now than at any point since 1980. corporate income sustains corporate debt, and moreover makes possible the wage gains that could fuel something more than a transitory increase in inflation expectations. rather, it is a signal that job losses are going to become much more severe in the near future as companies either cut back of go bankrupt. which ties in neatly with crashing leading indicators.
note particularly the seemingly miniscule dips that correspond to the 1990 and 2001 recessions.
unless or until the federal reserve cranks up the printing presses and starts debasing the dollar, this is a profoundly deflationary report.