Posts filed under “Inflation”
Nicholas Colas, Chief Market Strategist of Convergex, writes a daily preview/analysis for institutional clients. This is a sample of his work; contact info below.
The history of the hamburger is lost to the fog of human memory, but culinary historians have pieced together a likely migration path starting with the Mongol Empire and ending in Tulsa, Oklahoma about 100 years ago. It goes like this:
- The Russians of the Middle Ages called Mongols “Tatars”, and noted that these invading hordes ate finely chopped raw meat (probably horse). Yep, that’s where the dish steak tartare supposedly gets its name. Minced meat is, presumably, easier to digest than a slab of horsemeat.
- From there the dish moved to Germany, and the Hamburg-America line of boats served it, salted, smoked, or cooked, to immigrants coming to America in the 1850s.
- Delmonico’s restaurant in New York City offered it in the 1890s, with the recipe calling for a mixture of kidney and bone marrow seasoned with salt, pepper and nutmeg.
- Oklahoma stakes the claim for the first hamburger on a bun, and went so far as to make an official proclamation to that effect in 1995.
You know the rest – hamburgers are a wildly popular American food to this day (just go look at any Shake Shack around noon), even without the kidney and nutmeg. And because of that popularity, consumers have a remarkably good grasp on the price of ingredients. That makes the humble hamburger with equally popular toppings like cheese and bacon a remarkably good measure of observed inflation – something that consumers use to anchor their own inflationary expectations.
And that’s where the bacon cheeseburger stops being a food and starts its life as economic indicator. The details here:
- Using the Consumer Price Index dataset, we pull the information for ground beef, cheese, and bacon prices back to 1980. In deference to history and those on a low-carb diet, we omit the bun.
- We evenly weight each input and create a Bacon Cheeseburger Inflation Index and measure year over year price trends.
- The most recent data makes us think that the doves on the Federal Reserve must eat more than their share of bacon cheeseburgers. Our index shows outright deflation since May 2015 of 1-4% price declines versus last year.
- Go back through the price history, and negative 3-4% price declines for bacon cheeseburgers are often a sign that the Fed needs to cut interest rates and push liquidity into the domestic economy. I know that sounds weird, but the last time our Bacon Cheeseburger showed negative price trends of this magnitude was in 2009. Before that, it was 1998 (Asia crisis) and 1991-2 (Gulf War I).
That’s one example of what we call an “Off the grid” economic indicator – a piece of data that is never going to make it into a “Real” economist’s presentation, but does inform a specific narrative about the state of the American economy. We’ve been doing these reports for the better part of 5 years, every quarter, and over that time the analysis has always helped illustrate some facet of the real world that dry government statistics gloss over or just outright miss.
For this installment of the data, we’ve broken up the indicators into positive, “Meh” and bad.
Biggest Positives: anything to do with car and truck sales.
- Used car prices are rock solid according to Manheim, a leading auction house for such vehicles. Prices here have been stable since 2011, allowing consumers to trade in vehicles at high prices for new cars.
- Dealer inventories are in excellent shape. Americans buy cars and light trucks from dealer inventory, not directly from the car companies. Dealers like to have 50-60 days supply, allowing customers to find something close to what they are looking for when it comes to color and options. Inventories are currently at 55 days supply (57 for cars, 54 for trucks). That means that if vehicle sales remain strong, car companies will be able to increase production schedules for Q4 and Q1 of next year.
- Pickup truck sales are still increasing. Low oil prices are good for carmakers’ product mix, since thirsty large pickup trucks are much more profitable than fuel efficient cars. Even after 5 solid years of sales growth, trucks like the Ford F-150, Chevy Silverado, Dodge Ram, Toyota Tundra and Nissan Titan are still hot. Monthly sales gains this quarter average 4-12%. Since few people buy large pickups for personal use any more, this bump in demand is also a positive sign regarding small business growth.
“Meh” – Gun and Gold Coin Sales, Google Searches
- Firearm sales, as measured by the FBI’s system of instant background checks, are still remarkably robust. This year is on track to run +20 million units sold, similar to 2013 and 2014. On the plus side economically speaking, firearms are relatively expensive durable goods. That means strong sales are a sign of growing or at least elevated discretionary income. The economic downside is more of a social observation, for firearm sales really started to ramp higher in 2006 (to 10 million units for the first time), just before the 2007/8 Financial Crisis but long before the 2008 Presidential elections. The fact that they are still this strong is presumably a function of fears over incremental legislation, yes, but also in some part due to a sense of unease among part of the American population.
- Gold coin sales have soared in the last few months according to the US Mint. For the third quarter of 2015, gold buyers purchased $440 million of the yellow metal in the form of American Eagles. These are the highest sales since late 2012, or almost 3 years ago. Prior to Q3 2015, sales had been remarkably stable at a run rate of roughly $50 million/month since late 2013. As with firearms, this is good news/bad news. At +$1,200/troy ounce, gold coins are not cheap. But what does it say when capital markets volatility so easily jacks demand for gold?
- When you start entering a search into a Google search box the company’s software starts pairing up your partial entry with words other users have entered in an attempt to “Autofill” your query. Every quarter we look at what autofills for “I want to buy a” and “I want to sell a”. This time around, the “Buy” list was pretty similar to prior iterations, with the presumably temporary exception of “confederate flag” supplanting last quarter’s Mad Men inspired “the world a Coke”. On the sell list: “Car”, “House” and “Kidney”. The last one – which we should point out is illegal – has been in the top 3 for two years running.
The Bad – Food Stamps, Mutual Funds, Quitters, and Consumer Spending (Gallup)
- Many economists think that the US is at something close to “Full employment” – something in the region of 4-5% unemployment. That brings to mind the image of a country where everyone who wants a job can get it, support their families, plan for the future, and in general live the American dream. Then why are 45.5 million Americans enrolled in the Supplemental Nutrition Assistance Program (SNAP – what used to be called Food Stamps) as of June 2015? The peak program numbers were 48 million, back in 2013. So yes, 2.5 million people have been able to come off the program. But 14% of the US population – many of them children – is still enrolled. Before the Financial Crisis, that number was 26 million people. We are still 75% above that level.
- At the other end of the socioeconomic ladder, mutual fund investors are redeeming their holdings in U.S. stock funds at an accelerating pace. For the third quarter of 2015 through mid-September they pulled $58 billion out of these investment products. By comparison, January and February 2015 were +8 billion.
- Workers aren’t quitting enough. One sign of a truly healthy economy is that workers have the chance to quit their existing employer for a better opportunity elsewhere. The Job Openings and Labor Turnover Survey (JOLTS) shows what percent of separations are from “Quits”, and at the peak of the last cycle – early 2006 – that ratio was 59-60%. Now, even with “Full employment”, that number is less than 55%. As the accompanying chart shows, this percentage is closely tied to consumer confidence.
- Gallup’s Survey of Daily Spending Patterns has stagnated. When asked how much they spent out of pocket in the prior day, the average response is $89. For the last two years, it has been $95 and $94. That’s remarkable given the decline in energy prices, of course.
There are charts and tables attached to this note with more details on these datapoints, and we’ll close out with one final observation. America’s economic recovery since the Financial Crisis has been relatively narrow, concentrated on college educated workers and driven by rising prices for financial assets. For the rest of the country, there is a lingering sense of unease. We see that in everything from the gun/gold sales data to food stamp enrollment to the willingness to stay invested in mutual funds for their retirement. These points, which really speak to the country’s confidence in its economic future, are just as important as when the Federal Reserve increases interest rates. Maybe even more so.
ncolas -at- convergex.com
Can We Rely on Market-Based Inflation Forecasts? Michael D. Bauer and Erin McCarthy FRBSF Economic Letter, September 21, 2015 A substantial decline in market-based measures of inflation expectations has raised concerns about low future inflation. An important question to address is whether the forecasts based on market information are as accurate…Read More
U.S. Inflation Developments Vice Chairman Stanley Fischer Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming August 29, 2015 I am delighted to be here in Jackson Hole in the company of such distinguished panelists and such a distinguished group of participants. I will focus my remarks today on forces–domestic and international–that…Read More
There have been several theories floating around for why the Federal Reserve won’t raise rates in September: oil at $40 a barrel means there’s no inflation; the volatility in global markets; falling commodity prices suggest a global slowdown is a risk that might become more likely if China’s growth falters. I find none of these…Read More
Interest Rates and House Prices: Pill or Poison? Òscar Jordà, Moritz Schularick, and Alan M. Taylor FRBSF Economic Letter 2015-25, August 3, 2015 Policymakers disagree over whether central banks should use interest rates to curb leverage and asset price booms. Higher interest rates make mortgages more expensive and could prevent borrowers from bidding…Read More
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