Quote of the Day: Hard to Ignore Soaring Food Prices

Last week, the WSJ observed that 3 major food companies were having "their lunches eaten by soaring commodity prices. Costs at Campbell Soup, J.M. Smucker and Hormel Foods rose faster than sales in the prior quarter ended in October, helping to push their share prices lower at a time when such defensive stocks ought to be in high demand."

While had Campbell reported a 6.7% year-over-year revenue growth, its costs of goods sold rose 8.7%. Same thing at Smuckers: a 17% sales growth, but a  19% jump in costs. Even though Spam-maker Hormel had  an 11% drop in hog prices, high feed costs hurt its Jennie-O Turkey Store division.

After years of absorbing these cost increases, its reached the point where there is little choice but to pass price increases on to consumers. According to an AC Nielsen survey, eight U.S. branded-food companies had raised prices by more than 2% over the 12 weeks ended Jan. 26. Annualize that, and its a nearly 9% price increase:

"This is all hard to ignore…unless of course you’re an economist. They often disregard food prices when measuring inflation."

And that’s our quote of the day.

Thanks, Mark!

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Source:
It Is Hard to Ignore Soaring Food Prices
Mark Gongloff
WSJ, February 15, 2008; Page C1
http://online.wsj.com/article/SB120303447307470075.html

Category: Commodities, Consumer Spending, Economy, Federal Reserve, Inflation

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Category: Financial Press

Understanding What Recessions Are

One of the misunderstandings about recessions is what actually happens in the real world. A recession is where economic growth stops, and you are left with flat to contracting sales.

Real_retail_salesNote that economic activity does not grind to a halt — the year-over-year growth rate merely slips into the negative. This is often misstated, in some variation of "Gee, how it can it be a recession — I was out shopping and the stores were pretty crowded." Whenever you see that, the speaker is either technically misunderstanding what a recession is — or alternatively, is painfully long and hoping for the best.

Of course, Growth may falter, not total economic activity. With the $13 trillion US economy, economic
activity certainly won’t fall to zero dollars. Everyone is still
eating, driving to work, using electricity, phones, buying iPods, etc. If economic activity were to fall to an annual run rate of below $13 trillion dollars for a few quarters, well then there’s your mild recession. If it drops much below the $12.75 – 13 trillion dollar range, that’s a bit more serious contraction. Indeed, the greater the year over year contraction in economic activity, the deeper the recession.

Consider Housing:
Sales don’t drop from ~7m homes sold to
zero; rather, the number drops significantly (i.e., 4.5m sold). It only
seems like nothing after ther boom years.

But even if US activity were to drop a huge trillion dollars in a year — thats still a $12 trillion of economic activity, and that typically involves one or two people still going shopping and out to eat occasionally.

So far, we are only at the point where Real Sales have slipped into negative year-over-year territory. High food and energy prices, as well as health care, are keeping nominal sales positive. Outside of that, we see clothing, autos, homes all negative. Consumer Technology spending, and business CapEx spending remain positive.

Indeed, while many aspects of the economy are revealing marked weakness, select areas are still hanging on. We are just as likely to be in a recession — as not — as of February 19th, 2008.

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Real GDP Growth, Annualized Year over Year
Q1 1990 – Q3 2007

Q_growth_real_gdp

Source: Economagic

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Note:  We were out and about this past 3 day weekend (its not all linkfests); Our anecdotal expeiences are after the jump…   

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