Monday, October 5, 2009

Cherry Picking Price Data


What was truly notable in today's ISM disclosure was the collapse in the non-manufacturing Prices Paid index, which tumbled a whopping 14.3% in its current read of 48.8 from August's 63.1. Any spin of this data point that does not highlight it for the bright red deflation warning flag it is, would be naive.

This is the problem with cherry picking data - specifically data as volatile as ISM prices paid. Leaving aside the point that one is better served looking at manufacturing prices when you're dealing with cost-push inflation from a weak currency/strong commodity prices, let's look at the the historical data of non-mfg prices paid for the "reflationary" period anyway:

--Date ---% higher --- %same --- %lower --- index
Nov-08 11 49 40 37.0
Dec-08 9 50 41 36.1
Jan-09 13 55 32 42.5
Feb-09 18 57 25 48.1
Mar-09 12 59 29 39.1
Apr-09 9 70 21 40.0
May-09 17 68 15 46.9
Jun-09 26 60 14 53.7
Jul-09 13 59 28 41.3
Aug-09 23 71 6 63.1
Sep-09 9 77 14 48.8
(seasonally adjusted)

Isn't it clear why you shouldn't simply look at Aug-Sep, just as you shouldn't have looked solely at Jul-Aug so as to claim coming hyper-inflation? We must look at the trend, which is clearly up(higher lows, higher highs). Secondly, we also notice the trend of those paying lower prices is decreasing(while those seeing higher prices is flat to slightly up), indicating greater price stability as reflation takes hold.

%14 said they paid lower prices, %9 said higher, and this is a "deflationary red flag"? Look back to the heart of the "deflation" in Nov-Dec when %40 saw lower prices and the index was in the 30's. Now of course I also started my data set at the worst readings on the prices paid index to prove that this is in fact a relfationary period; if you look back further you'll see the deterioration in the index that coincides with the near collapse of the global banking system. If that couldn't cause a "deflationary spiral" should we really be worried about one month of data that does nothing but prove that some people see only what they want to?

btw: I'm a big fan of ZeroHedge and think it's one of the best financial blogs out there, I just disagree with their deflation bias...