In the continuing saga of weak economic numbers the latest report showed import prices once again outweighed export prices. In layman’s terms this means that the prices that U.S. companies received for goods exported was less than the costs of goods imported. As we have discussed in the past the impact of negative export prices on the overall economy is not good. While the current report showed that export prices increased over the last month due primarily to an increase in agricultural prices and import prices showed a modest decline due to lower oil costs; the gross deficit is of much more concern.
With businesses already in cost cutting modes for the last three years to protect profit margins the decline in the dollar has also led to high prices for imported goods. These higher cost imports either will impact the profit margins of businesses if they don’t pass them along or will create less consumption by consumers. Either way it will wind up eating into profit margins of businesses and ultimately reflected in the stock market prices.
The economy avoided the impact of negative export prices during the credit induced boom of 2004-2007 and, due to over $5 Trillion in stimulus injections and counting to date, has been able to hang on to modest economic growth currently. However, without additional stimulus from here it is extremely unlikely that the economy can organically sustain itself as import price pressures impact the consumer and corporate earnings. As we stated in our report on “corporate profits may be in trouble” “Corporate profits are a reflection of the economy, not vice versa. There is also a huge difference between corporate profitability based on top line revenue growth and bottom line cost cutting.” While cost cutting and layoffs have been the main driver of corporate profits over the last couple of years that is a process that is unsustainable in the long term. Corporate revenue already declined in the first quarter of this year and most likely in the second.
This report, combined with many of the others that have come lately, continue to show pervasive weakness not only in the domestic economy but now the global economy as well.