Monday, April 5, 2010

Don't Confuse Inflation with Economic Growth

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

While U.S. government generated data claims inflation is tame or non-existent, industry reports strongly contradict this view. The ISM reports on the state of U.S. Manufacturing and Services in March are indicating a great deal of inflation. Higher prices make the ISM data look better, as is also the case for the retail sales numbers issued by the government, but they are not the same as economic growth. Mainstream media reporting generally ignores this important difference.

The CPI figures for February, the latest available, had consumer inflation as zero month over month and up only 2.1% from the previous year. The low numbers reported in the statistics are used to maintain the Federal Reserves claims that inflation isn't a problem (cynics claim that it is the other way around). But industry can't be so cavalier about its statistics because if it has to rely on them to make business decisions. Industry group ISM - Institute of Supply Management - reports have been indicating inflation for nine months now.  Frequently the strongest component of the reports has been 'Prices Paid'. In the March report, 'Prices Paid' was at 75.0 and was up 8.0 from February.  No other item was growing as fast as prices. In the ISM reports, 50.0 is the dividing point between expansion and contraction. A number like 75.0 indicates very strong expansion. Anecdotal comments in the report corroborated this view, with one of the respondents stating, "We are also seeing dramatic price increases."

The ISM Non-Manufacturing, more commonly known as Services, report for March also had 'Prices Paid' as the fastest growing component. The number was a strong, but not out of control, 62.9. While inflation was pumping up the overall number in the Services report, the Inventories, Supplier Deliveries and Employment components were bringing it down because they were still contracting. Service employment has now contracted for 27 months in a row according to the ISM. The government's Non-Farms Payroll report last Friday indicated that the service component of the private sector added approximately 82,000 jobs. Apparently the ISM can't find any of them.

While the mainstream media has continually been reporting that the U.S. economy is recovering, investors shouldn't consider this to be of particular significance. Reports of an improving economy always take place after severe downturns. They may or may not be accurate. If you went back and looked at U.S. news coverage during the 1930s recession, you would be able to find a number of stories about how the economy was getting better and showing evidence of recovery. These reports went on for many years. After more than a decade of misplaced optimism, the U.S. economy finally did recover thanks to World War II.

Disclosure: Long oil

NEXT: Inflation Denial Won't Keep Prices Low

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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