More problems for the U.S. economy from the New York and Philadelphia Fed Regions

The most recent surveys from the New York Fed and the Philadelphia Fed, the Empire State Index and the Philly Fed Survey, showed that there are more problems ahead for the U.S. economy from those two regions especially what inflation and inflationary expectations are concerned.

Here are the problems in the New York Fed Region:

• General business conditions declined for the second month in a row with a huge drop of 41.3% in the most recent survey
• New orders have dropped for two consecutive months with a 38.9% drop in September
• Prices Paid remain at elevated levels with a slight up-tick in September
• Prices received jumped in September and could lead to price increases for consumers in the New York area which will fuel inflationary expectations
• Expectations for Prices Paid six months from now surged 20.9% in September which suggests that businesses expect to continue to pay high prices for goods they produce
• Expectations for Prices Received six months from now posted its second consecutive decline and shed 10.3% in September which is a positive sign for inflationary expectations but a big negative on company’s profitability going forward
• Expectations for Capital Expenditures six months from now declined for the second month in a row and shed another 16.9% in September which is a negative for the overall economy in that region

Are there any positives in the report?

• Number of employees expanded for a third consecutive month but it may fuel wage based inflation
• Expectations for Number of Employees six months from now remains stable which is good for the job market in that region but another possible negative on the inflation front

Here are the problems in the Philadelphia Fed Region:

• Prices Paid surged 50.0% in September which is a negative for inflation as company’s have to pay more for in-put costs
• Prices Received dropped for the second consecutive month and shed 51.5% in September which suggests that profits will continue to decelerate at company’s from that region
• Number of Employees dropped 64.6% in September which is a negative for the job market
• Expectations for Prices Paid six months from now surged to its highest level year-to-date with a gain of 18.7% in September which will add to inflationary expectations in the future
• Expectations for Prices Received six months from now surged 51.5% in September which will also add to inflationary expectations as it suggests that company’s plan to pass on the higher in-put costs to the consumer
• Expectations for Number of Employees six months from now dropped 28.3% in September which is a negative for the job market going forward
• Expectations for Capital Expenditures six months from now declined 19.0% in September which is an overall negative for economic activity in that region

What are the positives in the report?

• General Business Conditions expanded in September from its lowest year-to-date reading in August
• New Orders expanded in September which hints a slight up-tick in economic activity
• Expectations for General Business Conditions six months from now only declined slightly in September and held steady at current levels
• Expectations for New Orders six months from now jumped to its best year-to-date level with a 4.8% increase in September

Overall there are 14 negative points compared to six positive points for the economy and inflation as well as inflationary expectations from New York and Philadelphia regions.

Prices Paid components are very likely to remain at elevated levels with continued upward moves due to record high commodity prices, hard and soft commodities, especially after the ‘good’ economic move by Ben Bernanke’s Federal Reserve which on Tuesday decided to lower interest rates by 50 basis points to 4.75%.

That move had a direct negative impact on the already troubled U.S. dollar and pushed it to record lows against a mixed bag of global currencies.

Commodities are priced in U.S. dollars and enjoyed a strong rally from already elevated price levels after the rate cut which will continued to add to inflation and inflationary expectations which continue to be heavily embedded into the economic system and it seems like Ben Bernanke decided to turn its back on the problem to a few stable readings on inflation.

The Fed’s comfort zone for inflation is believed to be in the 1.5% - 2.0% region. Inflation has remained above that level for an extended period of time and after a period of slight down-ticks in inflation are very likely to move higher once again especially after Bernanke’s Federal Reserve unanimously decided to lower interest rates.

In a desperate attempt of Ben Bernanke and his Fed to ‘save’ the economy from further problems in the housing sector and the ongoing credit crisis, which were designed by low interest rates for an extended time period, Bernanke created more problems for the economy but temporarily delayed the impact of those problems a few months into the future.

In order to cure the economy from the problems Bernanke now created and temporarily delayed more action will be required and the chances of a recession have drastically increased. The Federal Reserve under the helm of Ben Bernanke may have to resume interest rate increases sooner then most economists expect.

One more indicator for the economic problems ahead as well as inflation and inflationary expectations in the future:

• The Bond Market. Yields continue to move higher which will have a direct negative impact on mortgage rates which may move higher as lenders can’t ignore the rise in yields. The yield on the 10-year note will likely exceed the Federal Fund Rate within the next few weeks.

Global Equity markets have rallied since the Fed rate cut but that rally could be short-lived especially if economic reports continue to show weakness in most aspects of the economy and if third-quarter earnings come in weaker then expected with fourth-quarter guidance that won’t live up to expectations.

Yep - long-term global indicators are not good. I wonder how long the Fed can run a dollar value that grows less and less with each quarter?