Philly Fed Confirms Margin Collapse

Tyler Durden's picture

Today's Philly Fed current activity index came at what at first glance appears to be a healthy 24.3 in December from 22.5 in November on expectations of 15.0. Great right? Nope. Reading between the lines shows that the critical Employment index dropped from 13.3 to 5.1, and further confirming the weakness in employment was the plunge in number of employees which dropped from 13.3 to 5.1: all other indicators merely confirmed yet another inventory driven short-term boost (pre-liquidation). Just as important, shipments plunged from 16.8 to 7.3 in one month. Yet what was most notable is the absolute explosion in the Prices Paid index which followed mortgage yields in going parabolic. From 34 in November, the Price Paid index surged to 51.2! Recall David Rosenberg discussing the mother of all margin squeezes yesterday... It's here. From the index: "Price increases for inputs as well as firms’ own manufactured goods are more widespread this month. Fifty?two percent of the firms reported higher prices for inputs, compared with 38 percent in the previous month. The prices paid index, which increased 17 points this month, has increased 41 points over the past three months. On balance,  firms also reported a rise in prices for manufactured goods: More firms reported increases in prices (21 percent) than reported decreases (10 percent), and the prices received index increased 13 points, its first positive reading in eight months." Add to this the earlier comments from Fedex that the main reason for the EPS miss (not so much revenue) was due to a spike in labor costs, and one wonders: Quo Vadis Deflation?

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Caviar Emptor's picture

Biflation strikes again!

Squeeze on margins as input costs rise and cost can't be passed on to a dying middle class. All as a result of Fed policy. Employment figure in the Philly Fed shows how this is now turning into a downward spiral: employment drops, worsening the ability to pass on costs as the middle class gets chipped away. 

Check mate. Everything you own: Down, Everything you need: Up.

Max Hunter's picture

Don't believe your lying eyes..

Sean7k's picture

I think scarcity might be next. With inputs going up and the people without money to buy- why would producers produce? If you can't raise prices (best buy eg) then you stop producing.

vachon's picture

You took the words right out of my fingers.  Walmart increases prices on thousands of toys so that they can fulfill the CEO's promise of a black quarter.  It ain't gonna happen or if it does it'll be at the expense of the next 2 quarters.  I live at ground zero 1.5, central Florida.  Without the snowbirds this season my dink, half full mall would close entirely.  When MSNBC starts talking about the permanently unemployed now, you know it has well and truly hit the fan.  The only question now is will we go out with a whimper or a bang.

Larry Darrell's picture

This has been going on since the spring.  I work in commercial construction.  Here's a list of things not produced until ordered on just one job.

Aluminum storefront glass and glazing.  Took 7 weeks when it used to take 2.5.

Drive thru loop detectors.  Took 6 WEEKS when it used to take 3 DAYS.

Specialty drive thru heaters.  Took 9 weeks when it used to take 4 weeks.

Corian for sink fabrication.  Orders used to come weekly.  Now they come bi-weekly for standard colors only.


The list goes on and on, but you get the point.  And this is what blows my mind about the numbers given by the Bureau of Lies and Such.  They say inventories are continuing to rise (which we all know here is the only reason we have any GDP growth), but there is zero inventory ready to ship on almost anything we order.

vachon's picture

Hey, I'm part of the real estate title insurance diaspora so you don't have to convince me.  Commercial real estate is continuing here ONLY if it had already started.  It's just that the banks are signing the paychecks instead of XYZ Construction Co.

SheepDog-One's picture

Biflation, exactly. Theres no inflation I guess as long as youre a multi billionaire banksta with ability to fudge the earnings and report whatever you want.
For everyone else on coolie wages paying far higher for food and energy, well not so good at all.

centerline's picture

Yeah, I think we see a shake out of essentials / commodities - those who can pass input costs forward do so precariously with thin margins.  Those who cannot have to slim further which means higher unemployment or lower wages (or both).  Will translate into further asset destruction and further impede consumer deleveraging.  Precisely why taxes can't go up too.  The squeeze would kill the consumer for sure... and a byproduct is keeping more money in circulation (which would be inflationary).  Overall though, I would say deflation is poised to kick ass and take names here.  Which is why we are hearing all sort of chatter about endless QE.

Bob's picture

This begs the question of how FEDEX can claim increased labor costs.  It that on top executive salaries?  Labor overseas? WTF? 

Jim in MN's picture

Cheesesteak, boochez

TexDenim's picture

CNBC was hailing this as a great number! Then they did a "whoops" when the ES cratered. These guys are clowns.

TexDenim's picture

She's a very thin but well-endowed Italian model (unamed) using a push-me-up-bra. My experienced eye tells me her jugs are real. 

redguard's picture

Denise millani, I believe.

redguard's picture

Your welcome, youtube- neo lebowski- for a laugh.

firstdivision's picture

So now that we are having confirmation that this "recovery" was an mirage, when do we start the wages on the amount of QE3?


OT: Nokia is bitch slapping the shit out of Apple now.  Apple's ego was too big for its britches.

Cognitive Dissonance's picture

QE 3 is already in production by way of European bailouts, which will soon morph to USA municipal/state bailouts. They only number the QE they can't hide.

AccreditedEYE's picture

There's just not enough money kids. They keep trying to throw everything including the kitchen sink at this but it will not work. At some point, you've issued so much currency that the game is negated either way... loss recognition or ultimate currency destruction. They can't keep fighting nature...


Drag Racer's picture

Oh I think there is plenty of money. Its just being lent to the wrong people. Main street is not seeing any of these so called bailout bucks so there is nothing winding up in circulation hence the claims of low inflation/deflation. The money being 'spent' is going in a loop from lender to gov. back to lender with all the players who set this crap up grabbing their share as it moves through the system while main street pays the interest on the 'fake' fiat stuffs.

In the end when the game is up the banks sit back with all the notes... (stock,mortgage,FRNs,etc.)

john milton's picture

its about a time to make them pay...24 patent suits in usa and now 13 in europe

Spalding_Smailes's picture

X,AIG,LVS,DRYS,JPM,BAC,C,DB are bulletproof) <---------

RobotTrader's picture

No worries...WYNN and SBUX still green. Gold getting slammed because there is no inflation.

Spalding_Smailes's picture

Ben walking the tightrope like the great " Farini " .... Deflation in the shadow banks, pomo, export inflation, oil,..... A true master.

Ben will go down as the greatest central banker/skywalker .... Viva' Uncle Ben.

goldmiddelfinger's picture

Wait till 2012 when you can 1099 SBUX if you spend more than $600/year there !. Ought to be a hoot!

tmosley's picture

Yeah, too bad the premiums are exploding.  $70 over spot for a one oz AGE!

Hell, look at the physical ETFs.  Some of them are bordering on a 15% premium!  Think of the implications of that.  It doesn't cost 15% to store and insure bullion.

Caviar Emptor's picture

But there is inflation...that's the whole point of the Philly Fed report and the negative market reactions. But it's mixed with deflation.

Keep in mind Fedex just said this same morning that they missed on top and bottom lines because of input costs into disappointing business. Same difference, my friend. 

Best Buy? Same difference: input costs rising (the real story of inflation) but can't raise prices into a constrained US consumer (the story of deflation).


Ya ain't seen nuthin yet: It's now officially into the next phase: a vicious cycle of rising input costs killing margins and earnings across most businesses. And as a result? More layoffs coming to control costs, weakening demand yet further. With loose money the normal supply-demand forces won't cause the expected adjustment: prices won't go down in the needed proportion due to decreased demand. But housing will continue down the slope, incomes also. And government austerity will only cut further into disposable income. Meanwhile we sent $2 billion to China as Americans bought the iPhone4 (!) ANd we have the first $3 gasoline Christmas ever! Nice setup...for a massive downsizing of the US economy. 

Red Neck Repugnicant's picture

I don't have any proof of this, so it's just speculation...

....but I've repeatedly said that the rich are the ones looking at real notable inflation.  Businesses that sell products to the middle class or poor are having a very difficult time making profits - just look at how grocery stores are being squeezed from both their suppliers and their buyers. However, businesses that cater to those with lots of disposable income (the rich, and teenagers) are thriving: Apple, Starbucks (profits up over 80%), Tiffany (profits up 27%), BMW (profits up 11-fold YoY), Wynn, Nordstroms (up over 40%), teen retailers, etc. 

While the market has risen dramatically, the majority of people cashed out or trimmed positions long ago, missing the bulk of the run-up.  It would have taken balls of steel to have kept all your money in this market, and not have cashed out a long time ago.  Investors who are trying to start new positions in the market (typically the upper middle class, or wealthy) are being totally flogged - look at the prices of stocks, or gold and silver.  Anyone trying to buy an investment is paying massive premiums from last year.  Some of the premiums are absolute records.  Anyone want to buy a basket of stocks at these prices? Anyone want to start a new position in Apple at $320?  How about gold/silver - you're paying record prices and record premiums to do so.  Those that are wealthy are finding it exceedingly difficult to park their money somewhere today without feeling completely scalped.  And the places that they shop are making wheel-barrows of money. 

Vegas is another example of inflation on the rich.  Rooms at the lower-end hotels (Ballys, Monte Carlo, Treasure Island) are cheap and empty.  On the flip side, rooms at Wynn are more expensive than they've ever been, and notably more expensive YoY.  Not only is it dramatically more expensive, but they're packed full. I had dinner at SW Steakhouse a month ago, and the host said they were booked full every night.  Dinner for three of us was $500, and none of us ordered anything unusual. There wasn't an empty table anywhere.  

Tickets to Le Reve were over $100/each and the theatre was packed. 

Business class tickets to Hong Kong on Cathay Pacific are $6000, and the sections are full. 

BMW is experiencing record sale increases YoY, and the rebates are nothing. 

Those people who have weathered the Great Recession and still have money and credit to spend/use, are getting scalped everywhere they turn.  The real inflation out there is on the rich. 


Caviar Emptor's picture

You got the 'musical chairs' game which this recession is causing: Wall Street is hoping that soon we'll forget about the millions chronically unemployed and those on food stamps and part time workers. They won't care that America has been downsized because they're a for of nationalized industry, just like in a pure communist economy. Full support under any kind of conditions. Their connections are such that they get whatever they demand. And so they are an artificially disproportionate segment of the economy. They don't produce, they are actually consuming what's left of the tax base from the productive economy. Without full government support they would downsize their huge overcapacity by 2/3 to 3/4. 

But yes, those with capital in this economy are winners because they pay less tax on their earnings, and don't need the productive economy. They are beneficiaries of the Fed largess. They own hoarded paper wealth that is being supported along with financial services. And that wealth is largely being shipped offshore in the form of investments, and into wealth-presrving passive investments in the US rather than new business formation or expansion. 

But yes, along with that comes inflation in the goods they consume because there actually is demand for BMWs, art, gold, French wines and the like. And to my point, money is so cheap and so loose that when there is even a bit of demand prices go flying. For the middle class, demand is constrained by a declining productive economy and business margins. Even with low demand levels, prices are climbing, but not as fast as in the rich sectors where there is demand. That's because loose money every where in the world raises the cost of every single cost input needed to make and ship those goods.

Bob's picture

Nice summary of the inner story of our Neo-Dickensian Prosperity. 

Red Neck Repugnicant's picture

So true...

It was the best of times, it was the worst of times....

Bearster's picture

If inflation was an increase in prices, the closing question would make sense.  But this is like the medievals defining speed as "degree of motion".   You know what they are trying to get at, but the definition is useless as a base to go anywhere from.

Once you grasp that speed is change in distance per time, and that inflation is an increase in credit, then you can actually proceed to the field of physics or economics, respectively.

By the way, regarding prices, the Austrian school has the solution to this conundrum.  Consumer prices are not a function of producer prices.  Consumer prices are a function of consumer's ability and willingness to pay.  If producers cannot make money at the prices consumers will pay then they can stop production but they cannot raise their prices.

Caviar Emptor's picture

In today's global economy, all the classical definitions and relationships don't apply. All due to excessive loose money and a global oversupply of dollars and global manufacturing overcapacity, along with secular cross-border shifts. 

Inflation should simply be defined as the instantaneous rate of change in cost of living and doing business in relation to time. Same with deflation. 

But to understand today's global economy, you need to get more granular than CPI and PPI: because key strategic inputs have massive effects like oil, food, and all related inputs to the cost of production of the two. 

That's why I say we have Biflation: some costs are rising not just relative to others, some are dropping. And which ones are rising versus dropping is key to understanding the effect on the economy. Otherwise why calculate a metric if it can't be used to guide policy?


That Peak Oil Guy's picture

Complicating the loose money problem (speculators swarming into commodities in an attempt to see some gains in their paper riches) is the fact that we are also experiencing very real production problems in the oil patch.  We have reached a production plateau but demand has recently increased.  Between the speculators and the complexities of Peak Oil (not so much a moment in time as a looped process of investment, consistently lower returns, price increases, and demand-destruction) it is hard to know what the true cost of oil should be, but there is little doubt that the most fundamental energy input to our industrial civilization is getting more and more expensive.  This is like climbing a mountain and the air getting thinner; how far and how fast can you go as the air becomes harder to obtain?


Tense INDIAN's picture

Tyler ...u havent commented till now about the HINDENBERG OMEN that appeared on Tuesday.......:


It has been confirmed :

the last time it appeared , it was discussed widely among the media...this time it isnt getting any attention..........this may be telling....

cossack55's picture

It is still getting lots of attention in Lakehurst.

unwashedmass's picture

 noticed the same thing, tense. last time, given that the big boys manipulate the market, maybe they intended just to shear a few sheep. this time....

they're getting out....look at those insider numbers.

what i am hearing is all sorts of lunatic talk about what a bargain AAPl. NFLX and AMZn are, and how stocks are "cheap"...

last ditch attempt to herd in the retail. me i'm buying QID, and praying.

SheepDog-One's picture

Theyve all gone way overboard yelling thru their megaphones how cheap superbubble pumperstocks like Apple and NFLX are. When everyone and their brother is super bullish, get the hell out of there.

unwashedmass's picture

 noticed the same thing, tense. last time, given that the big boys manipulate the market, maybe they intended just to shear a few sheep. this time....

they're getting out....look at those insider numbers.

what i am hearing is all sorts of lunatic talk about what a bargain AAPl. NFLX and AMZn are, and how stocks are "cheap"...

last ditch attempt to herd in the retail. me i'm buying QID, and praying.

centerline's picture

Is odd.


Also, gold getting bitched slapped.  Silver holding up.  Interesting as well.  

SheepDog-One's picture

Special deal so China can swoop in and buy up their gold lower with US Treasuries.

Confused Indian's picture

You still believe in Hinderburg omen. Its an old phenomenon now.

New Omens are all positive and are called, "Bernanke Omen", "QE Omen" and "Obama Omen".

Believe in Change.

unwashedmass's picture


excuse me, i don't care what the numbers say...there is NO inflation.

imaginalis's picture

excuse me, i don't care what the numbers say......there IS inflation.

SilverRhino's picture

 i don't care what the numbers say...there is NO inflation.


Then you're either a hermit that has not been grocery shopping in the last few months, or just someone that is willfully blind.   I'd say you were an idiot but I'd like to be optimistic this morning.


TheGreatPonzi's picture

He's obviously someone who didn't buy gold and wants to believe deflation is coming.

wiskeyrunner's picture

No need to worry the stock indexes won't fall, there is simply no way after spending trillions. The government and the Federal Reserve would have hell to pay, so relax stock indexes won't fall. If they did the losses would be made up overnight in the index futures, this is a risk free market.

SheepDog-One's picture

So your conclusion is there will never again be any hell to pay?

Caviar Emptor's picture

And you're unwittingly putting a finger on yet another hidden cost input inflation which is killing this economy: financial services. The cost of financial transactions for all Americans has risen way way out of proportion to the underlying demand in the economy due to the short circuiting of normal supply/demand/price discovery mechanisms. That's becuase the Fed has created an artificial demand, a fantasy island in the middle of desolation where banks can charge 22% interest on credit cards, and large banks can essentially sit tight and do minimal business with 0% interest money from the Fed just top ticking a few stocks and selling them on to your 401K (with love). And still collect huge fees. Without the Fed more than half the big banks would shut and merge. They'd be falling over each other to get businesses and individuals to borrow money and make investments to grow the economy. And their fees would be cut competitively.