In current $ terms, US business sales are running about 7.0 - 7.5% yr/yr through Q1 '12. This is
down from the very strong +10% we saw through much of 2011. Deceleration reflects essentially
flat export sales since last summer, lower CPI price momentum yr/yr, and a large decline in
power generation, which reflects a very seasonably warm 2012 to date. Inventories and sales have
remained in good balance. It is important to note that export sales make up about 15% of total
sales and that sales continue to be hampered by a weak EU and slower growth in China.
Over the past year, the pricing vs. costs spread has improved modestly. Labor costs are still
low relative to business pricing despite faster hiring as the real wage remains negative. Businesses
also continue to benefit from large net interest savings on very low credit costs. Potential for
further profit margin improvement in the shorter run is growing more constrained as pricing
momentum has been weakening relative to wage costs particularly.
Quick Output vs. Income Measure
US business output in real terms is up about 4% yr/yr. My economic power index ( yr/yr %
change in the real wage plus yr/yr % change in total civilian employment) is up a scant 0.9%.
The burden of this unfavorable spread has fallen hardest on household savings, with the
savings rate being drawn well down to finance higher consumption. Measured yr/yr, total
employment has been ranging around +1.7% so far in 2012. These have been the strongest
totals since early 2007, or right before the economy started to hit the skids. the progress in
total employment measured month to month has been the strongest since early 2010, and
given the very uneven progress of employment growth so far in this recovery, it would not be a
surprise to see slower jobs growth ahead, although I hope I am wrong and that jobs progress
will chug along at a healthy rate.
My inflation thrust indicator made a cyclical peak in Apr. 2011. By Sep. of last year the CPI
had accelerated to 3.9% yr/yr. The inflation thrust indicator dropped sharply over the Apr. -
Dec. 2011 time frame and has remained suppressed. The CPI has decelerated to 2.7% yr/yr
in the meantime, and must continue decelerating if business holds wage increases at 2%
going forward. Otherwise, the income side of the economy could remain sluggish and leave
the economy vulnerable. It is not healthy to have to continue to count on the draw down of
savings and the use of the credit card to finance higher consumption.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!