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Wednesday, May 21, 2008 1:25 AM


PPI shows Enormous Squeeze On Profits


There's more than meets the eye when it comes to the PPI. The variance between raw materials and finished goods on the PPI is enormous. Let's start with a look at the April 2008 PPI report.

The Producer Price Index for Finished Goods increased 0.2 percent in April, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This rise followed a 1.1-percent advance in March and a 0.3-percent increase in February. At the earlier stages of processing, prices received by producers of intermediate goods rose 0.9 percent following a 2.3-percent gain a month earlier, and the crude goods index advanced 3.2 percent after climbing 8.0 percent in March.
Finished Goods, Intermediate Goods, and Crude Goods



click on chart for sharper image

Charting The PPI Variance

Mr. Practical was commenting on the variance between the crude goods PPI and the finished goods PPI. This is what Mr. P has to say:
I sent this chart of the Producer Price Index out to a few friends. I began getting calls from people I barely knew. Apparently, the chart really made the rounds and astounded people.



click on chart for sharper image

I've talked about this before. I'm surprised people still don't get this. They look at the headline statistics the government puts out and don't bother to think about the real information embedded in the numbers.

The crush on profits is beginning to take full force as companies are having more and more difficulty passing higher input costs on to consumers, as they're getting squeezed too.

This is the most important statistical relationship to stock prices by far.
The charts show there is virtually no ability to pass on rising input costs. This will translate into declining profits. Declining profits are never good for stock prices. There is simply no other rational way of looking at this.

Five Things

Professor Kevin Depew was also talking about the PPI in point number 2 of "Five Things".

First up, the Producer Price Index. Producer prices rose twice as much as forecast in April, according to the Labor Department. The PPI excluding food and energy rose 0.4%, the year-over-year gain ratcheting up to 3%, the highest level since 1991.

But what is interesting about this report is the ongoing widening of the spread between finished goods prices paid less core goods. (see above chart)

This shows increasing pressure on producers to rein in raw materials costs that are not keeping pace with finished goods costs. Virtually every conference call we listen to says the same thing. That is why the consumer is so important now. Corporate profits are getting crushed right as we head into a consumer recession.
I keep hearing that there "must" be a passthru of cost increases. Where is it?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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