(Tempe, Arizona) — Economic activity in the manufacturing sector expanded in December for the 17th consecutive month, and the overall economy grew for the 20th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.
Uh huh.
The problem in the report is prices paid. This is the same problem I've been highlighting for months now - and there's no way this escapes having an impact on corporate earnings.
Oh, the crooners will try to discount it, but it won't work. Sure, the market is up ~2% on the Russell and Nasdaq today, and the DOW is up 100 - but most of it was before the number release.
The brown-nose media at least mentioned the prices paid problem this time around - it only took them six months to come to the conclusion that there might be a problem there.
The issue remains this - pick your poison, they're both bad. Either margins compress or consumer purchasing power gets trashed. In a world where labor is instantly arbitraged overseas there is no way to couple price increases back to wages for the vast majority of Americans.
As such the premise that we can "inflate away the debt" and it will all be ok is idiotic. It simply cannot happen as the average American does not possess any way to leverage these price increases back into their economic situation and thus grow their purchasing power at least as quickly as prices go up. This makes it impossible for manufacturers to pass through the increase in materials cost.
As I noted in my 2011 Ticker I believe this will be the story of 2011 that nobody, thus far, has talked about to any material degree. Yet it is what matters in the end when it comes to the final outcome for the economy.
I wish I could find a way to be bullish on a forward basis, even if it was to come up with some sort of nonsense scenario that took leverage out of the economy by "inflating debt away" as so many have claimed we will do.
Unfortunately the numbers say otherwise - that the premise that we've all been operating on for the two years has been a false God - hard assets have continued to decline in value even though their carried price has remained in the idiot zone from 2007 when everything smelled like a rose.
Remember, in 2007 there was nothing that anyone could do that was wrong. M&A was booming, we had "Merger Monday" every week, Downey Savings and Loan was going to $100 and then $120, Countrywide was going to own the mortgage business and the stock market was going to go up another 15-20% next year.
Instead it all came apart because leverage had built in the system and despite the machinations of The Fed, who tried like hell starting in August of 2007 to stop it, they could not keep the truth from being realized.
We're in the same place today but with corporate leverage at three times the level it was in 2007, unemployment vastly higher which makes it even more impossible to couple price increases back into wages, a budget deficit more than double where it was in 2007 and prices paid are ramping once again.
I wish we were not in this position, and if we had done the right things then we wouldn't be - but we are.
Margin compression - or if you prefer, collapse - will be the buzzword this year.
You heard it here first, starting in the early fall of 2010.
It becomes realized in 2011.
