A whiff of deflation

Every so often, and typically at three in the morning, you wake to hear a beeping noise. Sometimes it’s the battery in your smoke detector, calling sad attention to its demise. Sometimes it’s some other electronic warning or even, perhaps, an Eviltron, a tiny device that emits random beeps just to annoy its victims. At any rate, an indicator released today just set off one of those faint warnings.

Idavet’s the Chicago Purchasing Managers Index, produced by the Institute for Supply Management. The indicator is based on a monthly survey of — you guessed it — purchasing managers across the country. The index is a diffusion indicator: A reading above 50 means the economy is in expansion, while below 50 indicates contraction.

Unfortunately, the Chicago PMI walked off a cliff, falling 5.7 points to 48.7 in September. Just to pick a few bits from the unusually gloomy report released today:

  • Production led the decline with a sharp double-digit drop that placed it at the lowest since July 2009.
  • New Orders also fell significantly and both key activity measures are running well below their historical averages.
  • Just under 30% of the panel said China’s economic woes had a greater impact on them than the problems faced by the European Union.

The quote from Chief Economist of MNI Indicators Philip Uglow was also unsettling. “While activity between Q2 and Q3 actually picked up, the scale of the downturn in September following the recent global financial fallout is concerning. Disinflationary pressures intensified and output was down very sharply. We await the October data to better judge whether this was a knee jerk reaction and there is a bounceback, or whether it represents a more fundamental slowdown.”

The indicator is particularly worrisome for the Federal Reserve, which has been trying to combat deflation for the past decade. Mostly this has been felt in falling wages: If you were laid off during the financial crisis of 2007 to 2009, it’s likely that your new job offered worse benefits and lower pay. And the current trend of the so-called “gig economy” often has even lower pay and no benefits.

When wages fall, debt becomes more and more onerous. Your best bet, absent getting a raise, is to pay off debt and decrease spending. Unfortunately, cutting spending puts further downward pressure on prices — which, in turn, puts further downward pressure on wages. As bad as a wage-price upwards spiral is, a downwards spiral is even worse. Ask someone who has lived through the Great Depression, or re-read The Grapes of Wrath.

The most tangible display of deflation is through commodity prices — and not just oil, which is an outrageously rigged market that the Fed can’t really tamper with. But prices of other major commodities, such as copper, have been plunging as well.

 

The stock market chose to overlook the Chicago PMI today, instead focusing on the ADP employment report, which showed 200,000 new private sector jobs — which is a good number. But bond yields, which are only happy when it rains, moved lower. The September PMI may be a fluke, but somewhere in the depths of the Federal Reserve, a little alarm is going off.

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