A full fledged Deflationary Bust

This morning the NAPM reported a record low reading on their services index. This is the vast majority of the economy. Yesterday we learned that auto sales also declined by a record amount in November.
What both auto sales and services have in common is a continuing worsening of monthly measures compared with 2007. For example, in August car sales were down about 19% YoY. In September the loss was 21%. In October it was 23%. November's number, released yesterday,was more than 30% off from 2007.

Some time ago, I summarized Prof. Leamer's research on typical business cycle contractions: first housing, then durables (mainly cars and furniture), then non-durables, and finally services. When services go, you are in the full force of the recession. That's where we are now.

In the services report was another bomb: the prices index has also declined dramatically, also to a new all-time low -- from an all-time high only four months ago.

November CPI in 2007 was +.6%, a huge increase in a month that on a seasonally-adjusted basis typically comes in at -.1%. It is very likely that this November it will be replaced with another large deflationary number instead, confirming that a Deflationary Bust -- the first since 1938 -- is in full force.

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Comments

retail food

They expect retail food prices to increase in spite of the commodity bust.

I find that one fairly odious considering what is going on.

If the U.S. is having a full fledged deflationary bust, how's that going to affect your anemic recovery prediction?

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The only thing I can think of

Is if the farm subsidies for agricorps get affected by the recession/depression/whatever we're calling it this week.

If that happens, production of food will return to a for-profit business; and food prices will HAVE to rise to meet production cost at least.

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Maximum jobs, not maximum profits.

retail food stocks

I just did a quick check and they look all down right now.

I love the stock symbol for Proshares food and beverage ETF, PBJ

Hopefully we all know that stands for Peanut Butter & Jelly.

article on retail food sector ETFs.

I feel like buying some PBJ just so I could saw I am investing in the stock market, all of my money is in PBJ. ;)

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Food, autos

I don't buy the argument re food. If consumers are tightening their belts, what do food processors think they are going to do in the face of increasing food costs? Someone(s) on the producer side is going to cut prices and take market share.

Part of why I posted this diary is that, like Prof. Hamilton of Econbrowser, i consider the auto sales downturn (Hamilton says the actual number for November is 40%!) is particularly serious. I was hoping for a "bungee-jump" snapback after September and October (which is happening somewhat with retail sales) and instead the opposite happened. I had a chat with a certain "bonddad" last night in which we touched on how the traditional sentiment indicators (e.g., insider purchases/sales, public vs. trader sentiment) completely failed to telegraph the September-October waterfall decline.

When the traditional indicators fail to signal, you have to revisit everything (which I may possibly do in the next diary or two).

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my sentiments

I just get the feeling this is abby normal in terms of cycles.

I sure hope food retail does what you say because people plain need to eat and eat cheaply. I believe that the food industry has been taken over almost by a cartel like group of MNCs, from factory farms to retail brands, esp. in Processed foods so it might be a tougher nut to crack.

I was just looking at the auto bail out, about to write a short update piece for when I saw those numbers yesterday the very first thing that pops in my head was in 1930, Ford shutting down.

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You can't cut prices much more

on the producer side of food- due to subsidies to US/European Agribusiness undercutting local farming, food production is already *far below cost* and has no more room to move in that direction.

Having said that, *retail* margin on food still has some room to move, thus I suspect you're right on a retail level, but wholesale, has no place to go but up.

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Maximum jobs, not maximum profits.

I think we need to better define "deflation"

Some very prominent people have started screaming about deflation. But my sense is that we're not at that point yet.

I think what we've seen so far is merely the deflating of the commodity price bubble that occurred when all the hot money rushed out of various derivatives markets after summer 2007.

What I'm wondering is where all the hot money has gone now that it's rushed out of commodities. I think the answer is Treasuries, because I've seen articles reporting that lost of Treasuries are being sold even though they now have a negative real interest rate, because the buyers just want to make sure that they at least get their effing principal back.

Obviously, if that's what's happening, then money is not going into buying assets, which sets up the pre-condition for deflation. Are the experts screaming about the pre-condition having been set up, or about the bust of the short-lived commodities bubble?

An obvious thing to look at would be what commodity prices are now, compared to the past (at least)ten years.

Also, what is happening to capital expenditures? That would be the really important thing to watch, in my opinion. When we see prices of factory equipment starting to decline - that's my definition of deflation.

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I'd call precondition

And yes, PMI is indeed declining- already down to 1982 levels. But I'd call the price of factory equipment/raw materials a precondition as well- we'll see real deflation hit the retail market in January after the Christmas shopping season, a time that we normally see mild deflation in consumer prices due to cutting stock before taking inventory. But this year, nobody's buying- so the price will have to be cut more. Which will mean even more drop in factory orders than has occurred. Which will mean a real deflationary cycle beginning to set in.

The Obama Admin could combat this with real M1 stimulus- government spending and outright printing of money to get America out of debt and spending again.

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Maximum jobs, not maximum profits.