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Tuesday, July 7, 2009

ISM Prices Paid Up... End of Deflation Concerns?

Scott Grannis (Calafia Beach Pundit) is encouraged by the rebound in ISM price levels:

The prices paid indices are now at 50, which means that just as many survey participants are paying higher prices as there are paying lower prices. Despite the fact that the economy is still operating at a level that is significantly below its presumed potential, prices in general are not falling as the Fed's theory of inflation would predict. That means that the Fed is not starving the economy for money, and that is a good thing.
In other words if we are operating below the potential (we are), there (in theory) should be excess capacity, high unemployment, etc (there is)... and it is encouraging that we are seeing an increase in price levels due to the Fed adding liquidity to the system to combat these inflationary pressures.

But a data point or two does not necessarily make a trend... is it possible that this is simply due to the rebound in commodities (temporarily?) working their way through the system. Per Reuters:
Prices paid rose to 53.7 in June from 46.9, driven partly by a rise in oil prices, said Anthony Nieves, chair of the ISM non-manufacturing business survey committee.
I am more apt to guess the latter. While employment has gotten less worse (it has not improved... less than 50 indicates continued contraction), they are both still near historic lows. In fact, before the recent lows hit over the last six months, the last time employment was this low for BOTH manufacturing AND non-manufacturing jobs was.... well, never.

Thus, until individuals can demand increased wages (at the moment they cannot even demand full time working hours), I'll be keeping a close eye on price levels with the expectation they may retrench as long as the recent decline in commodities continues.

Source: ISM