Business Indicators

I do have a measure that suggests the momentum of business sales and profits out six
months in time. The outlook for US business sales volumes looking out through mid - 2014
has been improving nicely in recent months, and physical sales volumes measured yr/yr
have been edging higher since Aug. of this year. The breadth of new orders receive by
business -- an admittedly volatile series -- has also improved by 11% over the past six
months compared to the prior six. All good news for volume.

However, the business pricing power measure has not improved over the past year and this
suggests that the ability of companies to raise prices on expected higher volume looks
rather limited going forward. It will not take much in the way of stronger business pricing
to overcome the growth of primary business costs such as labor, but potential for such a
development is not up on the radar screen presently. The poor environment for pricing
does reflect the modest volume growth US business has been experiencing and the fact that
capacity utilization still remains modestly below the 80% level when more sustainable
pricing power normally develops.

If volume growth accelerates further into 2014, businesses should find it easier to raise
price points. However, investors need to keep in mind that when inflation does pick up,
investment rate of return assumptions normally also rise with the result that p/e ratios can
decline. The erosion to the market formula can be offset to the extent business price
increases fall to the bottom line and are not absorbed by higher costs.