Two inflation indicators and a leading indicator of economic activity ticked slightly higher in April. The increases in the consumer and producer prices indexes were mostly due to higher food prices. If there is one interesting trend that seems to have formed over the last year it is this: while there is price disinflation, and perhaps deflation, occurring in certain assets and commodities (housing and energy), food price inflation is alive and well. Over the last year, energy prices have dropped more than 25 percent, while food prices are up 3.3 percent. There are a lot of people in the world, and we’re growing every day. While we do not all have to drive cars or manufacture stuff, we do all need to eat. Investment idea: for investors active in equities, it would seem that a safe long-term growth area is any industry related to food, especially agriculture. One way to take advantage is to buy shares of an ag exchange-traded fund, such as PowerShares DB MS Agricultural ETF (DBA). ETFs offer diversity. Investors who prefer to own individual companies’ stock should consider grain processors and fertilizer makers who have little debt and a good track record. I would avoid ag equipment manufacturers, like Deere (DE)—the recession is likely to prove too much of a drag, and these companies typically carry heavy debt loads.
Below are reports on CPI, PPI and Real Earnings from the Commerce Department’s Bureau of Labor Statistics [when available, I will post the statistical tables on the Inflation Measures page, see menu bar above]:
Consumer Price Index
CONSUMER PRICE INDEX: APRIL 2009
CPI for All Urban Consumers (CPI-U)
The Consumer Price Index for All Urban Consumers (CPI-U) increased
0.2 percent in April before seasonal adjustment, the Bureau of Labor
Statistics of the U.S. Department of Labor reported today. This index has
fallen 0.7 percent over the last 12 months, due primarily to a 25.2
percent drop in energy prices. The year-over-year declines in March and
April are the first since 1955.
On a seasonally adjusted basis, the CPI-U was unchanged in April
after declining 0.1 percent in March. The energy index declined for the
second straight month, falling 2.4 percent after declining 3.0 percent in
March. The indexes for motor fuel, fuel oil, natural gas, and electricity
all declined in April. The food index declined as well, falling 0.2
percent in April after a 0.1 percent decrease in March. The index for
food away from home increased, but the food at home index fell 0.6 percent
with none of the six major grocery store food groups posting an increase.
Over the past year, the food index has risen 3.3 percent while the energy
index has declined 25.2 percent.
Offsetting the declines in the food and energy indexes was a 0.3
percent increase in the index for all items less food and energy. Over 40
percent of the increase was due to a second consecutive large increase in
the tobacco index. The index rose 9.3 percent in April as an increase in
the federal excise tax on cigarettes went into effect. A larger increase
in the index for medical care, an increase in the index for new vehicles,
and an upturn in the lodging away from home index also contributed to the
April increase. The index for all items less food and energy has risen
1.9 percent over the past year.
Table A. Percent changes in CPI for All Urban Consumers (CPI-U)
Seasonally adjusted
Expenditure Compound
Category Changes from preceding month annual Un-
rate adjusted
3-mos. 12-mos.
Oct. Nov. Dec. Jan. Feb. Mar. Apr. ended ended
2008 2008 2008 2009 2009 2009 2009 Apr. 2009 Apr. 2009
All items.......... -.8 -1.7 -.8 .3 .4 -.1 .0 .9 -.7
Food and beverages .4 .2 .1 .1 -.1 -.1 -.2 -1.6 3.3
Housing........... .0 -.1 .0 .0 .0 -.1 -.1 -.9 1.0
Apparel........... -.7 .1 -.6 .3 1.3 -.2 -.2 3.5 .9
Transportation.... -4.8 -9.7 -5.0 1.3 1.9 -1.1 -.4 1.8 -13.4
Medical care...... .2 .2 .3 .4 .3 .2 .4 3.7 3.0
Recreation........ .2 .0 -.2 .0 .4 .0 -.4 .0 1.2
Education and
communication.. .2 .2 .3 .3 .2 .2 .3 2.8 3.4
Other goods and
services....... .3 .0 .0 .3 .2 2.7 2.6 24.2 7.9
Special indexes:
Energy............ -7.8 -16.9 -9.3 1.7 3.3 -3.0 -2.4 -8.5 -25.2
Food.............. .4 .2 .0 .1 -.1 -.1 -.2 -1.7 3.3
All items less
food and energy .0 .1 .0 .2 .2 .2 .3 2.5 1.9
The food and beverages index declined 0.2 percent in April following
a 0.1 percent decrease in March. A 0.3 percent increase in the food away
from home index was more than offset by a 0.6 percent decline in the food
at home index and a 0.1 percent fall in the index for alcoholic beverages.
This was the fifth consecutive decline in the food at home index and it
has declined 1.6 percent since its November peak. The dairy and related
products index had the largest decline among the major grocery store food
groups for the third month in a row. It decreased 1.3 percent in April
and has fallen 5.1 percent over the past year. The index for cereals and
bakery products, other food at home, and nonalcoholic beverages also
declined in April. The index for meats, poultry, fish and eggs was
unchanged in April, as was the fruits and vegetables index. The food
index has risen 3.3 percent over the past year, with the food at home
index up 2.3 percent.
The housing index fell 0.1 percent in April, the same decline as in
March. The shelter index, however, rose 0.2 percent in April after being
unchanged the previous two months. The index for lodging away from home
turned up in April, rising 0.5 percent after falling in each of the six
previous months. The indexes for rent and owners' equivalent rent rose
0.2 percent and 0.1 percent, respectively. In contrast, the index for
household energy fell 2.2 percent in April after declining 1.8 percent in
March. The index for natural gas declined sharply, falling 7.0 percent,
while the index for fuel oil fell 0.3 percent and the electricity index
decreased 0.6 percent. The index for household furnishings and
operations was unchanged in April. Over the past year, the housing index
has risen 1.0 percent with the shelter index up 1.6 percent and the index
for household energy down 4.7 percent.
The index for transportation fell 0.4 percent in April after
declining 1.1 percent in March. Following a 4.0 percent decrease in
March, the gasoline index declined 2.8 percent in April. (Prior to
seasonal adjustment, gasoline prices rose 5.3 percent in April.) The
index for new and used motor vehicles rose 0.4 percent in April. The new
vehicles index rose 0.4 percent, while the used cars and trucks index
declined only 0.1 percent in April after falling 1.7 percent in March.
The index for public transportation declined for the eight straight month,
falling 0.8 percent as the airline fare index declined 1.5 percent. The
transportation index has decreased 13.4 percent since April 2008, with
several of its components declining over the period. The index for
gasoline fell 39.5 percent and the index for public transportation
decreased 5.9 percent, while the indexes for new vehicles and for used
cars and trucks declined 0.2 percent and 11.4 percent, respectively.
Among other CPI groups, the index for medical care rose 0.4 percent
in April after a 0.2 percent increase in March as the indexes for
prescription drugs and hospital services posted larger increases. The
index for education and communication rose 0.3 percent in April with
education index up 0.4 percent and the index for communication rising 0.1
percent. The index for other goods and services posted another sharp
increase due to higher tobacco prices, rising 2.6 percent in April. The
9.3 percent increase in the tobacco index followed an 11.0 percent
increase in March and the index has risen 28.8 percent over the past year.
The indexes for recreation and apparel both declined in April, falling 0.4
percent and 0.2 percent, respectively.
CPI for Urban Wage Earners and Clerical Workers (CPI-W)
The Consumer Price Index for Urban Wage Earners and Clerical Workers
(CPI-W) rose 0.3 percent in April, prior to seasonal adjustment. The
index value of 207.925 was 1.3 percent lower than in April 2008. On a
seasonally adjusted basis, the CPI-W was unchanged in April.
Table B. Percent changes in CPI for Urban Wage Earners and
Clerical Workers (CPI-W)
Seasonally adjusted
Expenditure Compound
Category Changes from preceding month annual Un-
rate adjusted
3-mos. 12-mos.
Oct. Nov. Dec. Jan. Feb. Mar. Apr. ended ended
2008 2008 2008 2009 2009 2009 2009 Apr. 2009 Apr. 2009
All items.......... -1.0 -2.1 -1.0 .3 .4 -.1 .0 1.1 -1.3
Food and beverages .4 .2 .1 .0 -.2 -.1 -.2 -1.9 3.4
Housing........... .0 .0 .0 .0 .1 -.1 -.1 -.7 1.3
Apparel........... -1.0 .0 -.6 .6 1.0 -.3 -.3 1.3 .7
Transportation.... -5.3 -10.9 -5.6 1.5 2.0 -1.3 -.5 .6 -15.5
Medical care...... .1 .2 .3 .4 .4 .2 .4 3.8 3.1
Recreation........ .1 .0 -.1 .0 .4 .0 -.3 .6 1.3
Education and
communication.. .2 .2 .3 .2 .2 .2 .2 2.3 3.1
Other goods and
services....... .3 .1 .1 .4 .2 3.9 3.8 36.8 11.3
Special indexes:
Energy............ -8.2 -17.8 -9.7 1.9 3.6 -3.1 -2.4 -7.9 -26.1
Food.............. .4 .2 .1 .0 -.2 -.1 -.2 -2.0 3.4
All items less
food and energy .0 .1 .0 .2 .2 .2 .3 3.0 2.0
Chained Consumer Price Index for All Urban Consumers (C-CPI-U)
The Chained Consumer Price Index for All Urban Consumers (C-CPI-U)
increased 0.3 percent in April on a not seasonally adjusted basis. The
index has decreased 1.1 percent over the past year. Please note that the
indexes for the post-2007 period are subject to revision.
Upcoming release
Consumer Price Index data for May are scheduled for release on Wednesday,
June 17, 2009, at 8:30 A.M. (EDT).
Producer Price Index
PPI in April 2009
The Producer Price Index for Finished Goods increased 0.3 percent in April, seasonally adjusted. This rise followed a 1.2-percent decline in March and a 0.1-percent increase in February.
The index for finished consumer foods moved up 1.5 percent in April following a 0.7-percent decline in the prior month. Prices for eggs for fresh use climbed 43.7 percent compared with a 9.5-percent decrease a month earlier.
Prices for finished energy goods inched down 0.1 percent in April subsequent to a 5.5-percent decline in the previous month.
The index for finished goods less foods and energy edged up 0.1 percent in April following no change in the previous month.
From April 2008 to April 2009, prices for finished goods fell 3.7 percent, as shown in the chart.
Real Earnings
REAL EARNINGS IN APRIL 2009
Real average weekly earnings rose by 0.1 percent from March to April after
seasonal adjustment, according to preliminary data released today by the Bureau of
Labor Statistics of the U.S. Department of Labor. This increase stemmed from a 0.1
percent increase in average hourly earnings. Average weekly hours and the Consumer
Price Index for Urban Wage Earners and Clerical Workers (CPI-W) were unchanged.
Data on average weekly earnings are collected from the payroll reports of
private nonfarm establishments. Earnings of both full-time and part-time workers
holding production or nonsupervisory jobs are included. Real average weekly
earnings are calculated by adjusting earnings in current dollars for changes in the
CPI-W.
Average weekly earnings rose by 1.3 percent, seasonally adjusted, from April
2008 to April 2009. After deflation by the CPI-W, average weekly earnings
increased by 2.6 percent. Before adjustment for seasonal change and inflation,
average weekly earnings were $607.13 in April 2009, compared with $603.12 a year
earlier.
_____________________________
Real Earnings for May 2009 will be released on Wednesday, June 17, 2009.
Gregg D. Killoren
victoria1014
The Shape of Things To Come
Explaining various forecasts for when the current recession will end and what the aftermath will look like seems to involve the use of shapes. Depending on the report, some economists see a “V-shaped” economic recovery, some a “U,” others a “W” or an “L.” For investors, how the recovery plays out matters greatly, especially now that equity markets have recouped their losses for the year on expectations that the recession has reached a bottom.
The shapes, or letters, themselves merely represent what U.S. economic growth (or contraction) would look like on a graph showing GDP along the side (y-axis) and a timeline along the bottom (x-axis). Thus, a “V” would depict a rapid decline/contraction followed by an equally-rapid expansion. A “U” depicts a rapid decline with a rapid-expansion as well, but with a long bottoming/sideways period in between. An “L” suggests that the economy has fallen off a cliff and will not return to growth for any reasonably foreseeable future. Finally, the “W” suggests a roller-coaster ride, where, following a rapid-decline, the economy picks up, only to fall again, before ultimately rising into a long-term expansion – this is also known as a “double-dip” economy.
An investor should plan his or her asset allocation, in part, on macroeconomic conditions. Thus, if one expects a V-shaped recovery, then it would be ideal to allocate more assets to the equity markets because stocks, having been beaten down during the decline, would be likely to rise quickly in the face of good-news, or as we are seeing now, less-bad news. A U-shaped recovery expectation is a bit trickier. Even though the expectation is for economic expansion in the future, the key question with the U-shape is how long does the economy flounder at the bottom of the “U” before recovering. While an investor would like to allocate more assets toward equity markets, he or she would not want to do so sooner than necessary; otherwise, those assets would likely sit idle until the recovery appears. An L-shape would dictate an asset allocation away from equities, and a W-shape presents a scary investing environment given the false recovery in-between the major decline and recovery.
So, what can we expect in the U.S. and globally? Unfortunately, arguments have been and are still being made for all four of these economic scenarios. We will now examine each to see if there are compelling reasons to believe in one of these scenarios over the others.
“V” for Victory
The V-shaped recovery has its roots in the “Zarnowitz Rule.” Victor Zarnowitz, a longtime guru of the National Bureau of Economic Research (NBER – the Business Cycle Dating Committee officially determines when recessions began and ended) and world renowned expert on business cycles, posited that forecasting recessions and expansions was extraordinarily difficult, but there was one reliable regularity about business cycles and business cycle forecasts: deep recessions are almost always followed by steep recoveries.
In a recent study, Robert J. Gordon, a longtime member of NBER’s Business Cycle Dating Committee, reasons that May or June 2009 could mark the trough of the recession. Gordon examines cyclical peaks in unemployment claims as the basis of his conclusion.
Michael Mussa, senior fellow at the Peterson Institute for Institutional Economics, is similarly optimistic (Mussa’s analysis). He sees accelerating growth in the Chinese economy in the first half of 2009, combined with substantial policy stimulus, helping to bottom out the U.S. recession by the middle of 2009, and then spurring U.S. growth to a 4 percent annual rate by the fourth quarter of 2009. The rest of the world will generally lag behind the U.S. and China, but Mussa believes that the global economy will be in recovery by the end of 2009.
Wossamotta “U”?
That’s the “university” attended by Bullwinkle J. Moose (I say attended because I am not sure whether he graduated, my apologies to Bullwinkle if I’m wrong). It also provides a nice metaphor for discussing a U-shaped economic recovery.
The International Monetary Fund (IMF) believes that, due to the fact that the current world-wide recession was caused by a financial crisis, it will be longer and deeper than the average recession (IMF report). Essentially, the IMF forecasts a recession lasting roughly two years, followed by a slow, weak recovery. Using the NBER’s official start of the recession in December 2007, the economy would bottom by the end of 2009 and show weak signs of recovery in 2010. Like Rocky the Flying Squirrel observing Bullwinkle stumbling his way toward resolving a problem, we and world central banks will watch the financial industry as it somehow pulls itself together and wins the day. This will just take longer than any of us are used to, and we will spend many days sighing like Rocky, knowing that there are better, faster ways, but, alas, Bullwinkle must be Bullwinkle (“Oh, East, I thought you said Weest!”).
Not So L-lectric
An L-shaped recovery is an interesting animal, if only because it is not a recovery at all. Rather, this model predicts a catastrophe in which the economy suffers some kind of shock (like a financial crisis), sustains a sharp decline in activity, later stabilizes, but does not recover.
Simon Johnson, of the Peterson Institute for International Economics, along with Peter Boone, Effective Intervention, and James Kwak, Yale Law School see such a stark future (study). Despite the improvement in credit spreads and the “less bad” news with regard to corporate earnings (many first quarter returns beat analysts’ extremely lowered estimates), Johnson, et al., note the following dangers to the economy still lurk:
The discussion of their U.S. outlook very nicely details the fundamental problem: the economy may be stabilizing but that does not mean there won’t be problems for large companies due to the issues listed above. Concluding the U.S. portion of the analysis, the paper states:
Investment Decisions in Varying Macroeconomic Environments
V, U, L? What’s an investor to do? The first thing to do is probably take a deep breath and understand that we are in the midst of one of the most complicated economic crises the world has ever faced. So, don’t beat yourself up if you feel confused when experienced phDs cannot come to a consensus on what’s coming next.
The worst thing any investor can do is to gamble on one outcome or another. The presentations cited in this article are all well-researched and well-reasoned, even though they come to vastly differing conclusions. If the recovery is a V-shape, we do not want to miss the new bull market (or if a W, we do not want to get clobbered one more time before the new bull market arrives), if it is a U-shape, we do not want our money to sit stagnant in the equity markets waiting for the rally, and if an L-shape is upon is, we do not want lose any more money than we already have.
This is why diversifying one’s investments is so crucial, especially now. And that does not mean being 100 percent in equities, but diversified across sectors of the economy. I literally mean diversifying your investments so that you have some exposure to equities, so that if a bull-market has begun, you will not miss out entirely on the beginning, but by keeping such exposure low, your risk of being burned by further economic decline or stagnation is limited. Counter that exposure with safe, income-producing investments, such as Treasuries, corporate bonds, and municipal bonds. With corporate and municipal bonds, seek out corporations and governmental entities that have strong balance sheets and are rated investment grade. Keep in mind your risk tolerance and investment goals.
It is also comforting to recall that your investments are not locked in for life. If a new bull market forms in equities, and your portfolio is underweighted, you can always shift resources to adapt to market changes. That is what active management is, after all. So, if you’re paying someone else to manage your future, make sure they have two hands on the steering wheel at all times. If they’re too busy for you, that’s OK (for them) – you need to take your portfolio elsewhere.
The shape of things to come will dramatically affect returns-on-investment. Careful planning and a full understanding of the implications of turns in the economy will be essential to navigate the future. While considering the shape of the economic future, also consider what shape your investment portfolio is in.
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