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Thursday, October 23, 2014 7:52 PM

European Service Prices Plunge at Steepest Rate Since January 2010; Reflections on Keynesian Stupidity

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The Markit Flash Eurozone PMI shows the steepest fall in output prices since the global crisis began. The PMI also shows renewed job losses in spite of an otherwise stable PMI.

The Eurozone saw a marginal upturn in growth of business activity in October, according to the flash PMI results. The headline Markit PMI ™ rose from September’s ten-month low of 52.0 to 52.2, signalling the first upturn in the pace of expansion for three months. However, the index remained below the average seen in the third quarter, and was the second-weakest reading seen so far this year.

Backlogs of work fell at the fastest rate since June of last year, dropping in both services and, to a lesser extent, manufacturing.

Service providers reported the first cut in payroll numbers since March, though manufacturers reported a slight upturn in employment. Prices were increasingly being cut in order to help boost sales. Average prices charged for goods and services showed the largest monthly fall since February 2010, having now fallen almost continually for just over two-and-a-half years. Charges for services fell at the steepest rate since January 2010 while a more modest decline was seen in the manufacturing sector, where prices fell only marginally and to a lesser extent than in September.

Price cuts occurred despite overall input costs rising in October, pointing to a further squeeze on operating margins. That said, manufacturing input prices fell for the second month running. Finally, business optimism about the year ahead in the service sector fell to the lo west since June of last year.

Markit Comments

"The Eurozone PMI rose in October but anyone just watching the headline number misses the darker picture painted by the survey’s other indices, which show the region teetering on the verge of another downturn. Growth of new orders slowed closer to stagnation and backlogs of work fell at a faster rate, causing employment to be cut for the first time in nearly a year. Business confidence in the service sector also slid to the lowest for over a year and prices charged fell at the fastest rate since the height of the global financial crisis, adding to an increasingly downbeat assessment of business conditions."

"While the survey suggest s the euro area has so far avoided a slide back into recession this year, a renewed downturn cannot be ruled out. Growth is so anemic that increasing numbers of companies are being forced into laying off staff and slashing prices in an attempt to cut costs and boost sales through discounting."

“The survey data are broadly consistent with GDP rising 0.25% in the third quarter, but unless demand picks up soon, growth could weaken again in the fourth quarter and deflationary forces could intensify."
My Comments

Prices received plunge the steepest since January 2010, but input prices are up. The latter is in spite of Brent crude dropping from 112 to 84-86 since June, and 98 to 84-86 since the end of September!

Rising wages in Germany help explain (see French Private Sector Output Falls at Sharpest Rate in Eight Months; Tale of Two Europes)

Isn't that what everyone wants? Yet competition for new business is so intense that "Prices were increasingly being cut in order to help boost sales."

Reflections on Keynesian Stupidity

Fancy that. Businesses are cutting prices to increase sales! Meanwhile Keynesian economists tell us that prices need to go up to increase sales.

Any business in Europe raising prices now would soon go out of business due to no sales at all.

And forget about the equally stupid Keynesian theory that consumers will hold off purchases when prices fall. They won't.

For discussion, please see Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit".

Mike "Mish" Shedlock

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