Import Prices Flashing Warning Signal
This morning the Bureau of Labor Statistics released the Import Prices for the recent month. "Overall import prices increased 2.2 percent for a seventh straight month of gains, the Labor Department said, slowing from a 2.6 percent increase in March. The increase was, however, above economists expectations for a 1.8 percent rise" While the headlines downplay the importance of rising import costs as investors this is something that we want to pay close
Rising import costs are an additional pressure on the cost of manufacturing and production. As imports rise the issue becomes at what pace can those costs be passed along to the consumer. As we have already written about several times in the past rising costs to the consumer are an additional tax on an already over leveraged and burdened consumer. Corporations has done a fantastic job of increasing productivity and while keeping employment low which has boosted the profitability of companies over the last two years as input costs plunged with the rest of the economy. However, that tailwind is now dissipating as import costs rise and companies lack the ability to continue to layoff workers and cut overhead costs have also vastly diminished.
As you can see in the attached chart whenever import costs rise above 5% on a year over year (YOY) basis the economy tends to slow. During the recovery from 2004-2007 import prices did rise above 5% without immediately impacting the economy due to the massive amounts of leverage and liquidity readily available to the consumer which allowed input costs to passed along. However, that was unsustainable and eventually the consumer cracked under it owns weight. Today, the excess liquidity and leverage is NOT available to absorb rapidly rising input costs so it is not surprising that we saw the 1st Qtr GDP number come in at 1.8% and now see most of the Wall Street houses scrambling to lower full year GDP expectations. These rising import prices don't bode well for 2nd Qtr GDP and we are now revising our 2nd Qtr GDP estimate to below 2% as well.