Hiking Prices Against Weakening Demand: How Will That Work?

Consumer demand for non-discretionary items is falling, especially for big ticket items like autos. Inventory across the board is at high levels. But input prices have been rising along with energy costs.

Nonetheless, Chinese factories are pondering a move likely to further dampen demand: hike prices.

china-global-footprint

Bloomberg reports China as Factory to World Mulls the Unthinkable: Price Hikes.

China’s factories may be on the cusp of delivering a new shock to the global economy after years of undercutting rivals with cheaper costs. This time, increases in prices could reverberate around the world.

To understand why, consider the dilemma facing Jiangmen Luck Tissue Mfy Ltd., now caught in a squeeze between surging wages and tepid demand. The company has already slashed staff by half, shaved prices and automated production to survive. Now, with margins razor thin, it’s weighing the first price increases since 2010.

“There’s just no possibility for me to cut prices any more,” says deputy director Roger Zhao, 52, whose company is based in the city of Jiangmen in southern Guangdong province. “Because costs are already pretty high and I don’t see any possibility they’ll go down, I’m seeking opportunities to raise prices a little bit.”

“China’s return to positive growth in producer prices marks a very significant turning point in deflationary pressures both in China and globally,” said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. “This is only step one, though. We are still waiting for step two: stronger global demand and trade.”

Yet deflation remains a headache for some. At toy drone maker Shantou Chuangxiang Toys Factory in Guangdong, sales manager Sheila Yip says prices are falling on 90 percent of her products because of intense competition from new rivals. The company is only able to increase prices on products with innovative features, she said.

China’s producer price index will weaken again after the first quarter of next year because the “root causes of disinflationary pressures — overall investment and excess capacity — are still very much alive,” Morgan Stanley analysts led by New York-based economist Ted Wieseman wrote in a note Monday.

export-prices-ppi

The weaker yuan is also one of the driving forces behind the PPI turnaround as it pushes up input prices of the raw materials China’s factories need.

“It’s no coincidence that China let the exchange rate weaken last year when deflationary pressures were high,” said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles. “While they may not have slayed the deflationary beast, they have at least wounded it.”

Falling Yuan

Whether or not this is some kind of “turning point” remains to be seen. If price hikes reduce demand, it will put some of these companies out of business.

And from the perspective of the US importer, a rising US dollar may mean prices do not even go up.

Finally, US manufacturers are likely to start screaming about the rising US dollar vs. the Yen and Yuan.

Global trade tensions have not gone away, they just shifted a bit.

Mike “Mish” Shedlock

Chicago ISM Index Dips to 5-Month Low Reading of 50.6; Inflation Pressures Rise



Volatility in the ISM Chicago Report (more widely known as the Chicago PMI) continues this month with a dip to a five-month low index reading of 50.6, barely above contraction.

chicago-pmi-2016-10a

The MNI Chicago Business Barometer fell 3.6 points to a five-month low of 50.6 in October from 54.2 in September, suggesting economic activity in the US lost some momentum having picked up in Q3.

The Barometer decline was led by a slowdown in Production, which fell 5.4 points to 54.4, giving up most of the gain seen last month but remaining above the 2016 average. New Orders also subtracted from the Barometer, falling to the lowest level since May. Order Backlogs increased slightly, but failed to jump out of contraction territory, where they have been over the past three months. Employment saw a smaller rise, edging back above the 50-breakeven level and recovering some of the lost ground experienced in the previous month. Meanwhile, Supplier Deliveries fell to the lowest level since June.

Companies decreased their stock levels at the fastest pace since May 2016, with the Inventories Indicator slipping back into contraction in October. Prices Paid rose to the highest level since November 2014, following the recovery in the oil price and panellists also reported higher prices for steel.

“A key takeaway from the latest survey was the pick-up in Prices Paid to a nearly two-year high. Inflationary pressures are on the rise, which is one of the metrics the Federal Reserve has been waiting for to increase rates. However, economic growth ahead, as read by the October Chicago Business Barometer, looks very disappointing. Hopefully, it doesn’t mark the start of a downward trend,” said Lorena Castellanos, senior economist at MNI Indicators.

ISM Chicago is a compilation of both manufacturing and service firms. Readings above 50 indicate expansion.

This series is quite volatile, but may indicate a dip in future ISM readings.

Mike Mish Shedlock



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1 thought on “Chicago ISM Index Dips to 5-Month Low Reading of 50.6; Inflation Pressures Rise”

  1. Last recession officially started December 2007

    Chicago ISM

    December 2007 … 56.4
    January 2008 … 51.5
    February 2008 … 44.5

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Personal Income Up 0.3 Percent, Real Disposable Income Not Quite 0.1 Percent

The BEA’s Personal Income and Outlays report shows personal incomes rose 0.3%.

Real DPI increased less than 0.1 percent in September and Real PCE increased 0.3 percent.

Spending rose 0.5% but the BEA revised August from +0.0% to -0.1% so effectively spending increased 0.4% from the unrevised number.

income-and-outlays-2016-10-31

Econoday Consensus

The reported numbers were mostly in-line with the Econoday Consensus Estimates.

personal-income-2016-10-31

Real Disposable Personal Income Year-Over-Year

real-disposable-income-2016-10-31

Econoday calls the report “solid” but sees the inflation data as “mixed to soft”.

The Econoday parrot is always happy when consumers have less real money to spend. The above chart simply is too “soft”.

The parrot would have been happier had inflation advanced more and consumers effectively made nothing.

Mike “Mish” Shedlock

Key GDP Takeaway: Ever Weakening Real Final Demand

What’s the most important metric in GDP report on Friday?

Caroline Baum tweets that it’s private final demand, the slowest in three years, excluding the first quarter of 2016.

Real Final Sales to Private Domestic Purchaser

real-final-private-sales

Ever Weakening Real Final Demand

A slightly different metric better highlights ever-weakening demand.

Real Final Sales of Domestic Product % Change From Year Ago

real-final-sales-of-domestic-product

I downloaded that data into an Excel spreadsheet capturing the yearly high for each year since 1950.

Real Final Sales of Domestic Product – Yearly Highs Since 1950

real-final-sales-percent-cnage

This is an ominous looking trend.

Real final sales of domestic product compared to the previous year trend lower as deficit spending and Fed printing rise.

Mike “Mish” Shedlock

Disastrous 6.6 Magnitude Earthquake Flattens Italian 14th century St. Benedict Cathedral

Best wishes and Warm thoughts to the ancient city of Norcia, Italy, the birthplace of St. Benedict, the father of monasticism.

Norcia was flattened by a 6.6 magnitude earthquake and only a facade remains of the 14th century St. Benedict Cathedral.

italy-quake1

Bloomberg reports Powerful Quake Shakes Italy, Topples Benedictine Cathedral.

Norcia, Italy (AP) — Another powerful earthquake shook Central Italy on Sunday, sending panicked residents running into piazzas, raining boulders onto highways and toppling a Benedictine cathedral and other historic edifices that had withstood several recent quakes. There were no immediate reports of deaths.

The quake with a preliminary magnitude of 6.6 was the strongest to strike the country in nearly 36 years, hitting a mountainous region northeast of Rome where people were still unnerved after a pair of jolts last week and an August quake that killed nearly 300.

Some 20 people suffered minor injuries. That there were no reports of fatalities was largely due to the fact that thousands had left their homes after the earlier temblors.

Closest to the epicenter was the ancient city of Norcia, the birthplace of St. Benedict, the father of monasticism, and famed for its Benedictine monastery. Witnesses said the 14th century St. Benedict Cathedral collapsed in the quake, with only the facade still standing.

“It’s as if the whole city fell down,” Norcia City Assessor Giuseppina Perla told the ANSA news agency. The city’s ancient walls suffered damage, as did another famous Norcia church, St. Mary Argentea, known for its 15th century frescoes.

Television images showed nuns rushing into the main piazza as the bell tower appeared on the verge of collapse. Later, nuns and monks knelt in prayer in the main piazza. A firefighter appealed to a priest to help keep residents calm in an effort to prevent them from looking for loved ones.

Mayors in some towns, including Castelsantangelo sul Nera, said coffins had been pushed out of their resting place inside cemeteries, which in Italy are typically walled structures.

“The scene is indescribable,” Mayor Mauro Falcucci told ANSA.

The quake struck a cluster of mountain towns, many of historic significance, already reeling from last week’s pair of aftershocks to last August’s deadly quake, including Norcia, Visso, Castelsantangelo sul Nero and Preci.

Some towns and smaller settlements were left isolated by landslides that blocked the roads, and the civil protection authority was responding with helicopters to help the injured, while also monitoring damage.

Italy Quake: Norcia Tremor Destroys Ancient Buildings

italy-quake2

The BBC reports Italy Quake: Norcia Tremor Destroys Ancient Buildings.

The 6.6-magnitude quake – Italy’s strongest in decades – struck close to the region where nearly 300 people were killed by a quake in August.

This time no-one appears to have died, but about 20 people were injured.

The medieval basilica of St Benedict in Norcia, the town closest to the epicentre, was among buildings destroyed.

An evacuation of buildings in the region deemed vulnerable to seismic activity last week, following strong aftershocks from August’s quake, may have saved lives.

Tremors from this latest earthquake were felt in the capital Rome, where the Metro system was shut down, and as far away as Venice in the north.

Why multiple quakes are hitting Italy – by Jonathan Amos, BBC science correspondent

We have now seen three magnitude-6 tremors in Italy’s Apennines region in just three months.

The big picture is reasonably well understood. Wider tectonic forces in the Earth’s crust have led to the Apennines being pulled apart at a rate of roughly 3mm per year – about a 10th of the speed at which your fingernails grow.

But this stress is then spread across a multitude of different faults that cut through the mountains. And this network is fiendishly complicated.

It does now look as though August’s event broke two neighbouring faults, starting on one known as the Laga and then jumping across to one called the Vettore.

The mid-week tremors appear to have further broken the northern end of the Vettore. But both in August and mid-week, it seems only the top portions of the faults have gone, and the big question is whether the deeper segments have now failed in the latest event.

Italy Earthquakes

italy-quake3

Mike “Mish” Shedlock

Cost to Vote in France $2.20; Juppe Widens Lead Over Sarkozy; Final Match-Up Juppe vs. Le Pen

French elections looking increasingly like a Marine le Pen, Alain Juppe match-up as Juppe Widens Lead Over Sarkozy in French Primary.

Former Prime Minister Alain Juppe is extending his lead over former President Nicolas Sarkozy in their battle for the 2017 presidential nomination of France’s Republican party, a poll showed.

Juppe is the preferred candidate of 39 percent of voters who identify as being on the right or center of the political spectrum, compared with 31 percent for Sarkozy, according to an Ifop poll published Sunday in Le Journal du Dimanche. That’s a lead of eight percentage points, up from six percentage points two months ago.

The survey is the latest to show Juppe’s lead widening in the vote that will be held in two rounds, on Nov. 20 and Nov. 27. Even so, the Ifop poll shows that Juppe’s support comes largely from voters who identify with centrist parties instead of from Republicans themselves. All voters are eligible to vote in the primary provided they sign a statement saying they believe in the values of the right and center and contribute 2 euros ($2.20) to the cost of the balloting.

The victor of the primary will go on to run in France’s 2017 presidential election, which will be held in two rounds in April and May.

Hollande Still Hoping

Hollande still has not dropped out of the running for the socialist party. The left looks to get crushed in both the preliminary rounds and the final round.

French Polls

french-polls-2016-10-29

French president Francois Hollande and Jean-Luc Mélenchon rate to splinter the Left vote. The result rates to be a match-up between Marine le Pen and her National Front party, and the winner of the Republican match between Nicolas Sarkozy and Alain Juppé.

Polls show Sarkozy or Juppé would beat Le Pen in the second round. Le Pen matches best against Hollande but would only get 46% of the vote. The only candidates Hollande might beat are Le Pen and Sarkozy.

Plenty can happen between now and the 2017 election.

Mike “Mish” Shedlock

Ultimate Irony: Hillary Caught on Tape Proposing Rigging Palestine Election

It’s interesting how much time and effort Hillary has spent, not answering question about emails but rather defending herself with ridiculous claims that Russia is behind the leaks and is rigging US election.

The ultimate irony in this mess is Hillary herself was caught on tape in 2006 proposing the US rig elections in Palestine.

Please consider 2006 Audio Emerges of Hillary Clinton Proposing Rigging Palestine Election.

On September 5, 2006, Eli Chomsky was an editor and staff writer for the Jewish Press, and Hillary Clinton was running for a shoo-in re-election as a U.S. senator. Her trip making the rounds of editorial boards brought her to Brooklyn to meet the editorial board of the Jewish Press.

The tape was never released and has only been heard by the small handful of Jewish Press staffers in the room. According to Chomsky, his old-school audiocassette is the only existent copy and no one has heard it since 2006, until today when he played it for the Observer.

Speaking to the Jewish Press about the January 25, 2006, election for the second Palestinian Legislative Council (the legislature of the Palestinian National Authority), Clinton weighed in about the result, which was a resounding victory for Hamas (74 seats) over the U.S.-preferred Fatah (45 seats).

“I do not think we should have pushed for an election in the Palestinian territories. I think that was a big mistake,” said Sen. Clinton. “And if we were going to push for an election, then we should have made sure that we did something to determine who was going to win.”

Chomsky recalls being taken aback that “anyone could support the idea—offered by a national political leader, no less—that the U.S. should be in the business of fixing foreign elections.”

Another part of the tape highlights something that was relatively uncontroversial at the time but has taken on new meaning in light of the current campaign—speaking to leaders with whom our country is not on the best terms. Clinton has presented a very tough front in discussing Russia, for example, accusing Trump of unseemly ardor for strongman Vladimir Putin and mocking his oft-stated prediction that as president he’d “get along” with Putin.

Chomsky is heard on the tape asking Clinton what now seems like a prescient question about Syria, given the disaster unfolding there and its looming threat to drag the U.S., Iran and Russia into confrontation.

“Do you think it’s worth talking to Syria—both from the U.S. point [of view] and Israel’s point [of view]?”

Clinton replied, “You know, I’m pretty much of the mind that I don’t see what it hurts to talk to people. As long as you’re not stupid and giving things away. I mean, we talked to the Soviet Union for 40 years. They invaded Hungary, they invaded Czechoslovakia, they persecuted the Jews, they invaded Afghanistan, they destabilized governments, they put missiles 90 miles from our shores, we never stopped talking to them,” an answer that reflects her mastery of the facts but also reflects a willingness to talk to Russia that sounds more like Trump 2016 than Clinton 2016.

Hillary is a liar, a hypocrite, a warmonger, beholden to Wall Street, beholden to the Neocons, and a fool.

Did I leave anything out?

Wait a second, I did. She is a threat to national security, committed perjury, obstructed justice, and belongs in jail.

For more details, please see FBI Reopens Clinton Probe: Too Little Too Late? Surprising Krugman Tweet.

When even Paul Krugman takes a pot shot FBI partisan politics favoring Hillary, you know something is seriously wrong.

Mike “Mish” Shedlock

FBI Reopens Clinton Probe: Too Little Too Late? Surprising Krugman Tweet

It should be clear to even the casual observer that the FBI purposely failed to investigate the Hillary email server scam as well as improprieties the Clinton foundation.

Today the FBI reconsidered. So here we are, 11 days from the election, with an unprecedented FBI probe of the likely next president of the United States, who will undoubtedly be given a pardon by president Obama in his final finger to US citizens.

NBC reports FBI Says It Will Investigate New Hillary Clinton Emails.

The FBI is reviewing a new batch of Hillary Clinton emails, bureau director James Comey said in a letter to the Senate Judiciary Committee on Friday.

“In connection with an unrelated case, the FBI has learned of the existence of emails that appear to be pertinent to the investigation … I agreed that the FBI should take appropriate investigative steps designed to allow investigators to review these emails to determine whether they contain classified information, as well as to assess their importance to our investigation,” he wrote.

Comey, who is also a Republican, took a lot of head in September for his agency’s decision to not press criminal charges in the investigation into Clinton’s use of a private email sever.

Comey Took a Lot of Head

Well, that likely explains everything.

In other news, Paul Ryan called for a suspension of all classified briefings for Hillary Clinton until Emails are fully resolved.

Isn’t this like closing the corral gates after all the wild horses escaped?

Tweet of the Day

The Tweet of the day goes to Paul Krugman, picked up by Glenn Grenwald.

Caroline Baum Ponders

I reiterate my tweet on why Wall Street backs Hillary.

Hillary Poll

Thanks Given

If Hillary does with this election, she can thank

  • The media for kid glove treatment
  • The media for feeding her debate questions in advance
  • Wall Street whores
  • Comey’s head

Of course, had Trump not totally blown the first debate, this race would likely be one-sided the other way.

I switched to Johnson following that debate, extremely annoyed that Trump failed to prepare at all. I have reassessed. I am voting for Trump, as long as he has any chance at all.

Mike “Mish” Shedlock

Real Investment Picks Up: 2016 Recession Off?

Real gross private domestic investment (not to be confused with income) is the measure of physical investment used in computing GDP.

Real GDPI measures investment in the private economy, not under the influence of massive amounts of relatively stable government spending. It is an indicator of the future productive capacity of the economy.

Real GPDI rebounded this quarter following three negative quarters, but the trend in investment remains historically weak if not outright recessionary.

Real GPDI – Percent Change From Previous Quarter

real-gpdi-2016-10-28a

The series is so volatile it’s difficult to tell much from that chart other than it looks very weak compared to investment in other 10-year periods.

Real GPDI – Latest 4 quarters

  • 2015 Q4: -2.3%
  • 2016 Q1: -3.3%
  • 2016 Q2: -7.9%
  • 2016 Q3: +3.1%

A better way of looking at GDPI is comparing growth to a year ago. Over time, GDPI should rise.

Real GDPI – Percent Change From Year Ago

real-gpdi-2016-10-28b

Negative year-over-year GPDI is associated with all 11 recessions since 1950. There were three notable instances of negative GPDI where a recession did not occur. Is this the fourth?

Real GPDI 2016 – Percent Change From Year Ago

  • 2016 Q1: -0.67%
  • 2016 Q2: -2.93%
  • 2016 Q3: -2.66%

We have now had three consecutive quarters of declining year-over-year real private investment.

GDI and GPDI Recession Indicator

An even stronger recession signal is given when Real Gross Domestic Income (Real GDI) is also negative. Unfortunately GDI was not updated in today’s GDP release. It will not be available until the third estimate of third quarter GDP on December 22.

For a look at how GDI and GPDI provide a strong recession signal, please see Real GDI, GPDI Recession Indicators Take II.

Recession Off?

Today’s 2.9% third quarter GDP estimate by no means precludes a recession this year.

The average year-over-year GDP growth rate at the start of recessions is 3.35%. Ten of the eleven recessions over this timeframe have begun at a higher level of real YoY GDP. The year-over-year growth rate is now 1.5%.

For details, please see Real GDP Increases 2.9% Led by Exports; Expect Revisions.

Today’s GDP report was nowhere near as strong as the headline number look.

Mike “Mish” Shedlock

Real GDP Increases 2.9% Led by Exports; Expect Revisions

Real GDP rose at a seasonally adjusted annualized rate (SAAR) if 2.9% according to the BEA’s Advance Estimate.

The acceleration in real GDP growth in the third quarter reflected an upturn in private inventory investment, an acceleration in exports, a smaller decrease in state and local government spending, and an upturn in federal government spending. These were partly offset by a smaller increase in PCE, and a larger increase in imports.

Exports surged 10%, imports 2.3%.

Real GDP

Doug Short at Advisor perspectives provides his usual fine display of charts in Q3 GDP Advance Estimate: A Surprisingly Strong 2.9%

gdp-2016-10-28b

The above chart shows the annualized% change from the preceding quarter in Real (inflation-adjusted) Gross Domestic Product and recessions as determined by the National Bureau of Economic Research (NBER). Also illustrated are the 3.22% average (arithmetic mean) and the 10-year moving average, currently at 1.39%.

Real GDP Historic Trend

gdp-2016-10-28c

Real Quarterly GDP Year-Over-Year Percent Change

gdp-2016-10-28d

A particularly telling representation of slowing growth in the US economy is the year-over-year rate of change. The average rate at the start of recessions is 3.35%. Ten of the eleven recessions over this timeframe have begun at a higher level of real YoY GDP.

The above three charts courtesy of Doug Short and Advisor Perspectives.

GDP Estimates

  • GDPNow 3rd Quarter: 2.1%
  • FRBNY Nowcast 3rd Quarter: 2.2%
  • Markit 3rd Quarter: 1.0%
  • Econoday 3rd quarter consensus: 2.5%

It’s far too early to proclaim a winner. Revisions explain why.

Expect Revisions

gdp-2016-10-28a

The average revision from Advance to the Second estimate is 0.5 percentage points, in either direction.

Because of ongoing revisions, the average change from advance to the latest estimate is a whopping 1.1 percentage points, perhaps years or even a decade later.

For now, unless data weakens considerably between now and the December FOMC meeting, the Fed is going to get in a December rate hike.

Mike “Mish” Shedlock