As Fed Policy Sinks the Dollar, Prices of Essentials Soar

November 9th, 2010

Daily Finance

By: Charles Hugh Smith

Intended or not, the Federal Reserve’s policy of quantitative easing has crushed the U.S. dollar. (The second round announced Nov. 3 is called “QE2″ because it’s the second round of easing since the financial crisis of late 2008.)

Intended or not, the Fed’s destruction of the dollar’s value has pushed prices of commodities that Americans need — such as instance food, cotton and oil — higher.

Whether the Fed’s QE2 policy will actually spark renewed growth in the economy is not yet known, but what is known is that the producer costs for essential commodities such as grain and cotton are skyrocketing, and those increased costs will soon appear on store shelves.

Tragic Irony

Just as pernicious for the stock market, higher commodity prices mean manufacturers’ profit margins will contract as companies seek to limit the cost increases passed on to recession-battered consumers.

It may be the ultimate — and ultimately tragic — irony: While the Fed’s policy is supposed to help the economy by encouraging more borrowing, the actual effect is to raise prices for companies and consumers alike, and to squeeze the very corporate profits that have been driving stocks higher.

These charts of the dollar, the S&P 500 (reflecting U.S. stocks) and three commodity ETFs (exchange traded funds) show the dramatic effect of the weakening dollar. While stocks have risen as overseas earnings for U.S. global corporations are boosted by the weaker dollar, commodities that end up in consumer goods have exploded higher.

The pass-through of higher input costs to consumers isn’t theoretical — it’s real. For example UPS just raised its shipping prices by 4.9%. Since shipping-box dimension charges are also being changed, the effective rate increase for lighter, larger boxes could be as high as 16%. This is significant in an economy that’s officially currently experiencing near-zero inflation. (Officially, the annualized inflation rates is 1.1%, according to the Bureau of Labor Statistics.)

According to the BLS, the cost of finished goods is rising at an annualized rate of about 4.8%. Since some low-demand commodities such as lumber (demand fell along with housing construction) and electronics (prices of TVs have been dropping) are declining, the price increases for essential goods may well be masked by a lower rate calculated for all finished goods.

For instance, wheat has jumped from $158 per ton in June, when the dollar began falling in response to the Fed’s QE2 chatter, to $271 per ton in September. That’s a 71% increase. You may not need a load of 2x4s or another flat-screen TV soon, but you certainly will be consuming wheat in bread, pasta and other foods.

Creating “Hot Money”

Many economists and market watchers think QE2 is bad policy: It’s unlikely to work as intended and could further damage the economy. How? By funneling a new flood of cheap credit into speculative bets in emerging markets and commodities while the Main Street economy withers under the onslaught of higher prices unleashed by the same Fed-powered speculative binge.

As I reported last month, the Fed’s “trickle down” policy of creating wealth for the top 10% who own most of the nation’s financial assets has been a failure. The rise in emerging markets like Brazil and in commodities like wheat suggest that speculative “hot money” is the result when the Fed opens the floodgates of liquidity. Brazil’s stock market, the Bovespa, has more than doubled since early 2009.

The semi-official reasoning behind weakening the dollar is that a lower greenback will boost exports. But since exports are a mere 7% of the U.S. economy ($1 trillion, compared to a GDP of $14.14 trillion), it’s difficult to see how a modest improvement in exports could offset the dramatic price increases that are occurring across the board in the rest of the economy.

Maybe all the financial speculation enabled by the Fed’s easy money, zero-interest rate policy (ZIRP) easing will enrich a few trading desks and hedge funds, but the price increases triggered by the Fed’s policy will certainly reduce the net income of every American household as prices for essentials climb.

If you have any doubts about that, just take another look at those charts of cotton, sugar and grain.

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Employers Cut More Jobs Than Expected in December

January 8, 2010

Yahoo News

By Christopher S. Rugaber

Lack of confidence in the economic recovery led employers to shed a more-than-expected 85,000 jobs in December even as the unemployment rate held at 10 percent. The rate would have been higher if more people had been looking for work instead of leaving the labor force because they can’t find jobs.

The sharp drop in the work force — 661,000 fewer people — showed that more of the jobless are giving up on their search for work. Once people stop looking for jobs, they are no longer counted among the unemployed.

When discouraged workers and part-time workers who would prefer full-time jobs are included, the so-called “underemployment” rate in December rose to 17.3 percent, from 17.2 percent in November. That’s just below a revised figure of 17.4 percent in October, the highest on records dating from 1994.

Many analysts had hoped Friday’s report would show the economy gained jobs for the first time in two years. While the revised figures found an increase in November, it was tiny.

“One word sums it up: Disappointment,” said Jonathan Basile, an economist at Credit Suisse.

Referring to the drop in the labor force, Basile said, “that tells me that Main Street doesn’t believe there’s a recovery yet, because they’re not out looking for jobs yet.”

Revisions to the previous two months’ data showed the economy actually generated 4,000 jobs in November, the first gain in nearly two years. But the revisions showed it also lost 16,000 more jobs than previously estimated in October.

The report caps a disastrous year for U.S. workers. Employers cut 4.2 million jobs in 2009, and the unemployment rate averaged 9.3 percent. That’s compared with an average of 5.8 percent in 2008 and 4.6 percent in 2007. Nearly 15.3 million people are unemployed, an increase of 3.9 million during 2009.

The economy has lost more than 8 million jobs since the recession began in December 2007. And some companies are continuing to lay off workers. UPS said Friday it will cut 1,800 jobs. And defense contractor Lockheed Martin Corp. said this week it is cutting 1,200 workers.

Most economists worry that 2010 won’t be much better. Federal Reserve officials, in a meeting last month, anticipated that unemployment will decline “only gradually,” according to minutes of the meeting released earlier this week. The Fed and most private economists expect the unemployment rate will remain well above 9 percent through the end of this year.

There were more job cuts Friday. UPS, the world’s largest package delivery company, said it will cut 1,800 management and administrative positions to streamline its U.S. package segment. UPS has 408,000 employees worldwide. About 340,000 of those workers are in the U.S.

If jobs remain scarce, consumer confidence and spending could flag, potentially slowing the economic recovery. Many analysts estimate the economy grew by 4 percent or more at an annual rate in the October-December quarter, after 2.2 percent growth in the third quarter.

But the economy will need to grow faster than that to bring down the unemployment rate. And economists worry that much of the recovery stems from temporary factors, such as government stimulus efforts and businesses rebuilding inventories.

Debra Winchell has been seeking work since last January, when she lost her job as an administrative assistant at the health insurance company. Winchell, 50, of Latham, N.Y., said she’s seen an uptick in online job postings, giving her some hope. But they’re for jobs paying as little as $10. And she’s still not getting any callbacks when she does apply.

With her unemployment benefits set to run out this spring, Winchell, who is single, said she will reluctantly sign up for temporary work.

“I’ll be lucky if it pays the bills,” she said.

Still, some economists said a recent trend of improvement remains in place. The economy lost an average of nearly 700,000 jobs in the first three months of last year, a figure that dropped to 69,000 in the fourth quarter.

And the private service sector added jobs for the second straight month, said Nigel Gault, chief U.S. economist at Global Insight, though the gains have been concentrated in temporary workers.

“Firms are still being very cautious, so the first thing they are turning to aren’t full-time employees, but temps,” he said. Companies have added about 166,000 temp workers since July.

The average work week remained unchanged at 33.2 hours, near October’s record low of 33. Most economists hoped that would increase, as employers are likely to add hours for their current employees before hiring new workers.

Job losses remained widespread: manufacturing lost 27,000 jobs and construction shed 53,000, while retailers, the leisure and hospitality industries and government also cut workers.

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