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Oct 21, 2008

Watch the Grocery Prices - Economic Recovery in Place?

I shop groceries for my three teenagers. Recently, I've noticed that specials are lowering prices for common items. 

This is good news.

Oil is Down, Food Prices Have Not Dropped, Who's Hoarding the Margins?

As oil price rose, food costs more than doubled at grocery stores.

Oil prices have dropped from a high of $145 in June to $71 - over 50% drop. In September, the global food index dropped to 188 from a high of 219, a 17% drop. No relieve has appeared at grocery stores or restaurants.

Latency from Macro Data

As a macro-economist, long latencies in data reporting create inefficiencies.
  • Government beauracrats are still working on the first draft of stats for Quarter 3. No doubt, they will be reporting more bad news. 
  • Data corrections, one year later, can reverse trends reported earlier.
  • Wall Street has already panicked and pulled the trigger. 
  • Venture capitalists in Silicon Valley followed.
Is our economy that bad? 

Governments, Wall Street, and investors respond to the macro-economic data. Normally these numbers change by fractional percentages. When these numbers change dramatically from month-to-month, few enterprises are prepared to respond. Economic analysis depends on historic trends repeating. When prices increase or decrease faster than normal, (i.e. non-linear acceleration effects) economics and past investor experiences are unable to foresee the future.

My analysis depends on macroeconomic data such as oil prices and the global food index. I also have good memory for grocery prices -- last year, last month. The latter lacks robustness since it's a single data point from one area. Nevertheless, I expect prices for gasoline and food products to drop, perhaps reversing a substantial portion of the 100% growth during the current fiscal year. 

This would be very good news.

Fiscal Stimulus

Consider the fiscal stimulus.
  • A friend complained about the $800 billion bailout. That's $4,000 per household. But, it's an investment where our government is likely to profit. Thus, the real cost to tax payers may be negligible. The bailout pumps cash into the economy to keep credits flowing from banks to merchants. 
  • European countries have committed $3.3 trillion. 
  • A proposed tax cut of $1,000 would be a small, one-time stimulus.
  • Households easily spend $500 a month on gasoline. Cutting that 50% saves $3,000 per year.
  • I guess household expenditures of $1,000 a month for food. 25% drop saves another $3,000 per year.
  • The multiplier effect of gasoline prices will drop prices for other goods and services.
Reluctant Price Drops

As the price of oil drops, gasoline, fuel, and other costs will follow. Reluctance of providers to lower prices quickly is understandable. Thus, the price decline benefits have been slow arriving into our wallets.

Consumers can pressure providers to drop prices more quickly. Prices increased quickly and can drop as quickly. That stimulus is greater than any bailout, tax cut, or other government policy.

Toward Recovery

Have Wall Street and VCs over-reacted?
  • Some blog claimed that Warren Buffet made the statement, "Cash is trash." Regardless, Mr. Buffet is buying.
  • Wall Street has jumped up and down by 400 points per day, sometimes swinging that much in a single day. Wall Street may be blind to the data that is changing daily.
  • Surveys show that many sectors of the economy are still healthy.
Forget the elections. 

Watch the grocery and gasoline prices. 

Those prices may be the best indicator of our economic health.

Remember to conserve energy to put more downward pressure on oil prices.

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