Lockhart Speaks: Ignore Reality, Inflation Is Transitory

Tyler Durden's picture

The borg collective is out in full force, with more gibberish on 'transitory inflation' coming from Atlanta Fed's Lockhart: "As I've said before, my expectation is that commodity price increases that are now translating into accelerating headline inflation will be transitory. In support of this claim, I'll make three points. First, these increases have been driven by global pressures in markets for food commodities, energy, and other commodities. These pressures are largely the result of supply-and-demand factors, some of which are one-off in nature. Second, inflation indices are made up of a wide spectrum of goods and services that don't uniformly have these commodities as inputs. Roughly two-thirds of consumer spending is on services, which are not materials-intensive. And, third, to the extent that some goods and services have these commodity inputs, the pass-through to ultimate consumer prices is limited." Fair enough: on the other hand one can present the following point indicating inflation is only transitionary to higher prices: "reality."

A View of U.S. Manufacturing

Dennis P. Lockhart
President and Chief Executive Officer
Federal Reserve Bank of Atlanta

It's a pleasure to be back in Knoxville and East Tennessee. I'd like to acknowledge with thanks Matt Murray, first for the invitation, and also for his work and that of his colleagues at the University of Tennessee's Center for Business and Economic Research. We have found the center's work to be essential to our understanding of Tennessee's economic performance.

Lee Jones, our regional executive in Nashville, and I also want to acknowledge the service of Jenny Banner, CEO of Schaad Companies, on our Nashville board of directors. Also, Billy Carroll, CEO of SmartBank in Pigeon Forge, has just joined this board. Jenny and Billy follow Debra London, formerly CEO of Mercy Health Partners, representing Knoxville and East Tennessee in our preparation for policy deliberations in Washington.

Each of these executives puts (or has put) in substantial time to give the Federal Reserve intelligence on the real economy in real time. That is to say, they help us understand what business people, labor representatives, and consumers are actually experiencing at a point in time as close to the meeting of the Federal Open Market Committee (FOMC) as possible. This ground-level information and insight supplements the macroeconomic data we pore over constantly to gauge how the economy is doing.

Here is what I plan to do today: I will take a few minutes to give you my up-to-the-minute take on the state of the national economy. I will include my sense of the near and medium outlook. I would then like to take a deep dive, as they say, into a vital element of the country's economic fortunes that I know is important to East Tennessee. That is the manufacturing sector. I will close with comments on inflation.

It's important that I state up front that what you'll hear today are my individual views. They may not be shared by my colleagues on the FOMC or in the Federal Reserve System.

State of the economy and outlook
The economy is now in the eighth quarter of expansion. Private demand grew at a very strong pace toward the end of last year. The incoming data suggest that the economy continued to expand in the first quarter, but at a slower pace than was expected based on the strength in the fourth quarter.

The economy has some things helping it grow and some things holding it back and preventing more rapid improvement. Let me catalog these factors for you. Positive forces include 1) growing consumer activity, 2) sustained strong business investment in equipment and software, 3) pretty strong exports, and 4) rising availability and use of credit by businesses and consumers (particularly for purchases of durable goods such as autos).

Restraining forces include 1) a weak housing sector affecting both construction activity and consumer confidence, 2) rising gasoline and energy prices with continuing concern about the course of events in the Middle East and North Africa, and 3) a clutch of other concerns and uncertainties such as the path of inflation, the still-high level of unemployment, the resolution of fiscal politics in Washington, and the impact of fiscal adjustment at all government levels. Among manufacturers, there is concern about supply chain disruption resulting from the events in Japan.

The recent housing market data have been particularly disappointing, and this information weighs on the consumer psyche. Consumer confidence and spending have been weaker than many were expecting. On the positive side, the labor market has improved in recent months, and the industrial activity data remain very strong.

Although the economy may have lost some momentum at the start of the year, and notwithstanding the factors exerting a drag on growth, I still expect a continuing moderate pace of expansion. This moderate growth will gradually bring down the level of unemployment. I am also forecasting that the composite of inflation measures will level off around a rate consistent with the Fed's price stability mandate. I will come back to this point later on in my remarks.

The U.S. manufacturing sector
The recovery is proceeding in part because of a relatively strong rebound in manufacturing production and employment from the depth of the recession. In 2010, both production and employment in manufacturing industries outpaced growth in the rest of the economy. Strong foreign demand for U.S.-made goods boosted manufacturing exports, which last year made the largest contribution to gross domestic product (GDP) growth since the Second World War.

The latest data show that the manufacturing sector has sustained the strong production gains recorded in 2010. Manufacturing output expanded at an annualized rate of approximately 9 percent in January and February. The manufacturing purchasing managers index (a timely and important indicator) remained at strong levels through March. This index encompasses information on production, factory orders, shipments, and inventory data. The rebound of this index in this recovery has been the strongest since the rebound following the deep recession of the early 1980s.

So now let me walk you through a discussion of the status of and outlook for the manufacturing sector. I will cover the following topics:

    * A definition of manufacturing—what industries are included in measures of production, for instance.
    * The current profile of manufacturing in America. Here I will comment on the evolution of the sector over recent decades.
    * Manufacturing as a source of employment.
    * And, finally, how manufacturing costs factor into inflation outcomes in the greater economy.

Manufacturing sector defined
For level-setting purposes, I'll define what manufacturing encompasses in the U.S. economy. The sector encompasses a great number of industries and activities, from raw steel production to motor vehicle assembly to water bottling and oyster shucking. Yes, even light processing of products of nature like water and oysters is considered manufacturing. The Department of Commerce has 473 classifications under manufacturing.

The manufacturing sector includes establishments such as factories, plants, and mills. Think of establishments as individual sites where manufacturing activity occurs. A company may have multiple sites. There are approximately 340,000 manufacturing establishments in the United States. These establishments produce goods through mechanical, physical, or chemical transformation of various materials, both raw materials and already-manufactured goods. These are transformed into both semi-finished and finished goods.

A number of industries—a good example is the auto industry—employ the supply-chain model, whereby lead companies do final assembly as well as product design, brand management, and distribution. Feeding the assembly line are tiers of suppliers who manufacture components. Manufacturers of components, in turn, rely on their producers and suppliers of raw materials.

Profile of U.S. manufacturing
Manufacturing output represents about 11 percent of the U.S. economy in real GDP terms. It may surprise you that this percentage has been relatively constant for several decades.

A lot has been written about the growing demand for Chinese-made goods, and China's manufacturing sector is expanding rapidly. Despite China's rapid growth, the United States remains the world's largest manufacturer. According to U.N. data, the United States accounts for one-fifth of global manufacturing output in real terms. That share has held largely constant for the past 20 years.

The United States' high share of global manufacturing output reflects to a significant extent the size of the U.S. economy and domestic demand. Although U.S. exports have grown rapidly, the United States is not the world's largest goods exporter. China and Germany export more manufactured goods than the United States.

In the current recovery, manufacturing production has grown faster than total GDP. But while GDP has already reached prerecession levels, manufacturing output is still about 10 percent lower than three years ago because of its outsized decline during the recession.

Performance within the manufacturing sector has varied widely across industries during the recession and afterwards. Some industries, such as apparel, were in secular decline for many years. Domestic apparel manufacturing was hit hard by the recession and has benefited little from the recovery. Other industries have experienced cyclical swings. Metals production, for example, contracted and then expanded largely in sync with the economy. And a few industries, notably the computer and electronic products industry, rose strongly for many years and slowed only briefly during the recession. Computer and electronic products output is already 20 percent higher than before the recession.

Manufacturing as source of employment
Coming back to the long view, while manufacturing output through the years maintained its share of total GDP, manufacturing's share of jobs has steadily declined. In the 1950s, almost one in three payroll jobs was in manufacturing. Today that number is less than one in 10.

In terms of absolute employment levels, the number of manufacturing jobs fell by almost five million over the last decade and currently stands at around 11.6 million after remaining relatively stable during the 1980s and 1990s. In contrast, manufacturing output over this period has grown at about the same pace as the overall economy. Obviously, increasing production combined with stable or falling employment is only possible if productivity is rising.

Output per worker has increased faster on average in manufacturing than in the overall economy. In many cases, productivity gains in manufacturing have been the result of automation and robotization. In other cases, productivity gains have been realized by reconfiguring production processes, including the offshoring of more labor-intensive, early-stage component production to locations where labor is cheaper.

Higher productivity has translated into higher wages. Although employment in the manufacturing sector is much lower than 20 years ago, manufacturing wages remain higher than average wages and have been growing faster. Currently, the average weekly wage in the manufacturing sector is nearly $200 dollars higher than the average for all private industries—double the premium of 20 years earlier. This increased wage premium reflects the changed mix of jobs and relatively higher skill requirements in the manufacturing sector today.

I want to summarize manufacturing in very basic terms: its output level is up; output share is steady; employment is down; productivity is up and, therefore, wages are up. That's the manufacturing story in a few words.

I am aware there is a lot of angst about the manufacturing sector. In part this is driven by the fact that the sector is no longer the generator of jobs it once was. Realistically, the future of the manufacturing sector depends on its ability to change and reinvent itself in response to global competitive pressures. So far, the sector has done this pretty successfully. In my view, to paraphrase Mark Twain, reports of the demise of U.S. manufacturing have been greatly exaggerated.

Inflation picture and monetary policy

Now I'd like to come back to the subject of inflation, which is mostly not a story connected to manufacturing. As I've said before, my expectation is that commodity price increases that are now translating into accelerating headline inflation will be transitory. In support of this claim, I'll make three points.

First, these increases have been driven by global pressures in markets for food commodities, energy, and other commodities. These pressures are largely the result of supply-and-demand factors, some of which are one-off in nature.

Second, inflation indices are made up of a wide spectrum of goods and services that don't uniformly have these commodities as inputs. Roughly two-thirds of consumer spending is on services, which are not materials-intensive.

And, third, to the extent that some goods and services have these commodity inputs, the pass-through to ultimate consumer prices is limited.

Historically, prices for industrial commodities have tended to exert a relatively small effect on most consumer prices. Even when commodity prices rise at double-digit rates, prices of most intermediate and final goods usually increase considerably less. In the short term, producers tend to absorb some of the cost increases because of competitive pressures. Over time, in the face of higher input costs, manufacturers also shift to lower-cost production methods in order to maintain price competitiveness. In addition, for most goods, materials costs are small relative to other costs.

Looking ahead, this is not to say there will be no pass-through effect on inflation. The point is the effect is likely to be muted.

It is, of course, the Federal Reserve's responsibility to ensure that temporary ups and downs in the rate of headline consumer inflation do not turn into a persistent inflationary trend. In my view, the objective is growth in overall consumer prices at an annual rate of about 2 percent. And I think the relevant period for judging success is a medium-term period of three or four years.

A key factor influencing price stability is the inflation expectations of the public and investors. My colleagues and I are watching various measures of long-term inflation expectations for signs that public sentiment about longer-term inflation trends is shifting. At the moment, with longer-term inflation expectations remaining stable—and predicting that commodity price growth will stabilize—my view is that current monetary policy is appropriate.

My view of the future permits a degree of patience as regards monetary policy. There is still a halting and fragile quality to the economy. I think the process of restoration of full economic strength with higher employment continues to require support. That said, planning for an eventual change of course is completely appropriate as long as public discussion about planning deliberations and the plan itself don't create premature expectations of tightening.

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-Michelle-'s picture

And, third, to the extent that some goods and services have these commodity inputs, the pass-through to ultimate consumer prices is limited.

Yeah, I think I'm going to go with the Wal-Mart CEO's take on this.  Pass-through is not going to be limited for long.

Mike2756's picture

So, corporations and the consumer will be crushed by higher prices. voila'!. is transitory, yes?

MarketTruth's picture

INFLATION FACT: My very close friend works for one of, if not THE largest food wholesaler within the USA. While food did go up on the wholesale level on many products Jan 1 (2011) to the tune of ~4%, the notice just came out that MANY food items are going up next week at the wholesale level from 4% to over 10% per item.

Also, there was an alert that some products will be changing their container size, generally keeping height and width yet cutting down on the depth (remember, shelving space is set for size, yet depth can easily be dealt with in retail locations). Again, this is FACT and coming from one of, if not THE largest food wholesaler in the USA.

spiral_eyes's picture

eat ipad2 instead, that is deflating. crunchy and delicious consumer electronics.

spiral_eyes's picture

not to mention delicious and nutritious nflx nom nom nom nom

tarsubil's picture

INFLATION FACT: The chicken strips I bought at Chick-fil-a last week closely resembled chicken nuggets I bought 2 years ago.

-Michelle-'s picture

So, they're probably closer to what an actual portion size should be.  I suppose that's the silver lining of this. 

We don't do fast food anymore.  We have a limited amount budgeted for restaurant dining and we sure as heck aren't going to waste it at a drive-through.

PhotonJohn's picture

You may know what your budget is for restaraunt but most Americans do not. I am afraid that the only way most will be able to tell is when they look at their account one month and the credit cards are maxed and there is not enough money for the mortgage.

tarsubil's picture

I'm supposed to eat 1 g of protein for every pound of muscle. This is no where near what my protion size needs to be. That said. I love you Michelle.

Rikki-Tikki-Tavi's picture

And since we all know the raw material prices have gone up a great deal more it is very hard to imagine margins not being squeezed significantly - we will start to see the extend next week as Q1 numbers starts to come out.

DavidC's picture

What with his speech and Christine Romer's comments yesterday I feel positively euphoric.

Or not.


ElvisDog's picture

The Romer interview yesterday was stunning. Her delivery with that sunny little smile and laugh. At first, I thought "she can't be that stupid". By the end of the interview, I was coming to the conclusion "my God, she really is that stupid". The wonder of it all is how someone that stupid could be so successful in our society. Amazing. If anyone hasn't seen it, look it up.

Best line of the whole interview was when she said "our academic models show that QE works".

overmedicatedundersexed's picture

elvis, you do not understand the power of our new mind altering antipsycotic meds..a little lithium, a lot of abilify and seroquel..and she is ready to go...it just sad that those also cause weight gain and diabetes but on her the fat is just a reflection of her inflated self image.

ReeferMac's picture

You gotta be fucking kidding me!

One Goobermint Hack comes out and says Fuel is 25% of American's budget, Housing nearing 50% (which means' it's not really all that bad out there).

This dickwad comes out and says 66% of American's budget is spent on services (e.g. Netflix).

Even my 2nd grade Son can do the math on that one?

Impeach them all!

EscapeKey's picture

But actually, he thought as he readjusted the Ministry of Plenty's figures, it was not even forgery. It was merely the substitution of one piece of nonsense for another. Most of the material that you were dealing with had no connection with anything in the real world, not even the kind of connection that is contained in a direct lie. Statistics were just as much a fantasy in their original version as in their rectified version. A great deal of time you were expected to make them up out of your head.

ElvisDog's picture

Orwell's vision of Big Brother was genius to be sure. I just wish he hadn't indulged himself in the romance between Winston (himself) and the hot, young party member. I was constantly distracted by the thought that there was no way this hot, young thing would be attracted to and pursue a middle-aged, depressing, low-level guy with a weeping sore on his leg.

WinstonsPetRat's picture

Depends. In that world, similar to one we now inhabit, where was she ever going to find someone who she could trust with such a relationship. I know i've been looked at as being depressing before, it's because i am, because there are so few people out there I trust to understand the world around them. It shows unfortuantely, and it makes social interactions with the ignorant lower and arrogant middle very difficult, and utterly futile. As for what women want in relationships at the moment..... and they wonder wh the divorce rate is so high. :)


Besides there are far worse places to have a weeping sore.

aint no fortunate son's picture

Inflation will become transitory only when the FRB has become transitory

Infinite QE's picture

+1 with all the Fed governors swinging from lamp poles with piano wire around their necks!

Cdad's picture


Agreed.  What has been so shocking in recent months is the discovery of just how fucking stupid the criminal syndicate of bankers really is.  Just moments ago, while trying to pimp yet another reason to buy fucking equities, a criminal syndicate Wall Street banker actually said, "In China, there is demand for food."  Now I did not graduate at the top of my class, I confess.  However, it won't be said about me later that folk did not know if I was smart enough to continue breathing. 

No...China demands food...and from there...buy equities?  Fuck me.  I guess when you've been talking into the echo chamber of the BlowHorn [CNBC] for as long as these guys have, and without the disruption of any thoughtful questions from the BlowHorn crew, I guess whatever you say starts to sound good...to you.

This banker crew...these brokers...analysts...so many of them strike me as "bag of hammers" stupid.  And yet, these are the big bucks guys.

That Peak Oil Guy's picture

Services are provided by humans.  Two of the primary inputs into humans are food and energy.  Ergo, rising food and energy costs will result in rising services costs.

Due to high labor costs in the face of demand destruction most services companies have been cutting corners in their staffing levels for a long time, resulting in quality problems.  Either they will need to start hiring to get quality back or we may see even more demand destruction in services as people decide they don't need services that don't provide a solid value proposition.

Yeah, commodity costs have nothing to do with services.


FunkyMonkeyBoy's picture

Seriously, why are these criminals still alive on this planet?

What i don't get is why do americans have all this home weaponary and right to bear arms bulls**t, if not for times like these when the country is being destroyed from the inside and the perpetrators of this mass genocide are easily identifiable...

... what do americans use their guns for? Opening beer cans and switching off lights like Homer? 

Snidley Whipsnae's picture

History illustrates that people revolt when they become hungry... Americans are not hungry...yet.

Monday1929's picture

I fear that people with thoughts like this will decide that with the death of the Rule of Law, it may be appropriate to assasinate leading bankers. That is why we must urge our elected representatives to work even harder for our collective good.

Bicycle Repairman's picture

Americans will use their weapons in defensive (legal and justified self-defense) mode only.  Assassinating bankers is unadvisable for several reasons, including it will solve nothing.

hedgeless_horseman's picture

While America will use her weapons in defensive (Libya, Kuwait, Iraq, Afghanistan) mode only?

Bicycle Repairman's picture

Protection from individual fellow citizens.  Don't try to take on government agents.  They are better trained and equipped.

FunkyMonkeyBoy's picture

Land of the free, home of the brave. Eh?

100% facist society. Mission complete.

Golden monkey's picture

Retail inflation is a one way train.

No big mac flippers will be ordered to drop the prices.

Bernanke is not a lyar; he's just insane.


Catullus's picture

Boils down to "Commodity price inflation is a result of one-off supply and demand 'pressures' (despite a considerable absense of any supply destruptions). A lot of the price inflation is in the service sector (a good, but completely unrelated and possibly counter point the first point). And finally the end-use price inflation is not that bad because my 45% weighted to housing CPI metric says so."

Mercury's picture

These pressures are largely the result of supply-and-demand factors...

As if the price of everything else in the universe isn't largely the result of supply-and-demand factors.

bingaling's picture

Yes exactly. There is a large supply of dollars chasing a limited amount of goods -

The larger the supply of dollars the greater the cost for that limited amount of goods . It will also result in increased sales for businesses yet they sell less . Which results in poor employment . Less employment the less people there are to buy houses . Even though businesses will have higher earnings it does not mean their profits are rising when compared to the "transitory" inflation .

Snidley Whipsnae's picture

Lickhard jawboning again...ignore the blowhard.

Flasher will jawbone later today...you will hear more of the same bs.

earnulf's picture

Two thirds is service oriented?    Maybe for the upper 5% of Americans, the rest of us have to buy groceries and fillup the tank.   For the lowest 50% that is more than 33% of our disposable income.

That "one-time" pressure on commodities is the flush of the dollar into the toilet.   Watch the pressure on this one!

magis00's picture

$61 for me to fill up last night.  And I'm sure it's not merely $3.79/gallon this morning, since WTI keeps going up. 


That's 2 1.5 oz/Ag!  Fucking crazy.

-Michelle-'s picture

Truly.  Our services are barely $100 a month.  That's a $7.99 Netflix sub, internet, and $25 put aside to refill our cell phones as needed.

Meanwhile, we just increased our grocery budget by $100 and we're signing up for a CSA and looking to buy a quarter beef to keep things under control for the next year.  We planted our garden and put in 10 fruit/nut trees.

These people have no idea what's going on out here in the real world.

IEVI's picture

Now you get it...you and the lower 95% don't matter to the fed.

Urban Redneck's picture

The sole purpose in allowing 2/3 of the population to work is so that 100% of them may serve the FED.  The other 1/3 is unemployed. 

TraderMark's picture

The always entertaining Marc Faber 'doom gloom and booming' on CNBC this morning - 11 min vid


Josh Randall's picture

They cut out the part where Liesman threatens to hunt Faber down and eat him if he hears anymore negative discourse

Snidley Whipsnae's picture

Marc Faber right on as usual. CNBC bobble heads floundering as usual. One unusual bit was a brief comment about 'class warfare'...I haven't heard that phrase in some time.

blindfaith's picture

Jusus...no wonder we have global warming with all this hot air BS never ending spew.

TaxSlave's picture

Ha, 'two thirds of spending is on services, so inflation in the price of goods you need to survive is meaningless'.

Services are overhead for production of goods, or else they are a flat out expense with no return.

It is impossible for services to generate excess wealth.  Wealth spent on services must first be generated in the form of products and there must be a surplus above baseline consumption in order to afford them.  You can't get rich if you and your neighbor take in each other's washing and neither of you produce anything.

Our government and entitled classes have reached the tipping point in predatory behavior.  Things will slide downhill from here as assets built up in previous generations are consumed, inflated and taxed away for the benefit of the Tapeworm Society.  At the end of the game, the banks own everything, enforced by the government gun, and production will be taken over for your own good because you are too greedy and would charge too much for your work if you were free.  You will be told that freedom was tried and it failed because you are too greedy and untrustworthy.

I gotta stop listening to 'progressive radio' on the way to work.

UninterestedObserver's picture

See you are completely wrong - YOU can't get rich but the assholes that produce nothing can because they are printing money like crazy. 

TaxSlave's picture

Yeah... They're smarter than us and we NEED them.

Edit: And they completely disarm us with their moral arguments, we should be guilty if we profit and survive even a little better off than those who do nothing.

UninterestedObserver's picture

Yes the army of PHD's that are destroying our world can do no wrong - you must obey 

Monday1929's picture

I was wondering why I was not getting wealthy taking in my neighbors laundry, and he mine, as per the "Taking in Your Neighbors Laundry for Dummys" book. Was Eddie Cantor wrong?