CPI Shows Sharply Rising Medical Costs; Huge Obamacare Hikes Planned

The CPI came in exactly in line with the Bloomberg Consensus option today.




It's the details, not the overall number that is worrying. Medical care and rents have been rising rapidly.

The Fed likes to ignore food and energy costs. They have their chance to prove it.

From Bloomberg ...

Pull forward that rate hike is what some of the hawks are thinking after reading today's consumer price report where a benign looking headline, up only 0.1 percent in April, masks rising pressure through many components.

Excluding food and energy, core prices rose 0.3 percent which doesn't seem that much but is outside Econoday's high-end forecast for 0.2 percent. It is also the highest since January 2013. The year-on-year rate for the core is plus 1.8 percent which, after dipping to 1.6 percent earlier in the year, is closing in on the Fed's general inflation target of 2.0 percent.

Readings showing pressure are outside energy including medical costs (up a very steep 0.7 percent in the month) and education costs (up 0.5 percent). Shelter costs, reflecting rising rents, came in at plus 0.3 percent for the 3rd time in 4 months which is the hottest streak for this reading since way back in late 2006 and early 2007. Also standing out are gains in furniture (up 1.3 percent) and used cars (up 0.6 percent).

Oil prices have been on the rise but not energy costs, at least in the April report which fell a heavy 1.3 percent. Gasoline fell 1.7 percent in the month. Two other readings also showed downward pressure: airfares (minus 1.3 percent) and apparel (minus 0.3 percent). Food costs were flat.

The headline CPI is down 0.2 percent year-on-year which looks downright deflationary. But the lack of pressure is due entirely to energy which is down a very deflationary 19.4 percent year-on-year. Energy prices are bound to firm given the recent move in oil from the high $40s for WTI to $60. That and emerging price pressures through the bulk of the consumer economy raise the risk that inflation may be brewing after all.

The CPI Seasonally Adjusted Numbers from the BLS look even worse.

Seasonally Adjusted

• All Items Less Food and Energy rose 0.3% (following a rise of 0.2% in March and 0.2% in February)
• Medical Care jumped 0.9% in April (following a rise of 0.4% in March).
• Used Cars jumped 0.6% (following a rise of 1.2% in March and 1.0% in February).
• Shelter rose 0.3% (following a rise of 0.3% in March and 0.2% in February) 

Supposedly energy prices declined 1.3%. Gasoline led the way with a 1.7% decline. Does that seem believable?

Health Insurers Seek Hefty Rate Boosts

Worse yet, planned Obamacare premiums are about to explode, setting the stage for debate over federal health law’s impact.

The Wall Street Journal reports Health Insurers Seek Hefty Rate Boosts.

Major insurers in some states are proposing hefty rate boosts for plans sold under the federal health law, setting the stage for an intense debate this summer over the law’s impact.

In New Mexico, market leader Health Care Service Corp. is asking for an average jump of 51.6% in premiums for 2016. The biggest insurer in Tennessee, BlueCross BlueShield of Tennessee, has requested an average 36.3% increase. In Maryland, market leader CareFirst BlueCross BlueShield wants to raise rates 30.4% across its products. Moda Health, the largest insurer on the Oregon health exchange, seeks an average boost of around 25%.

All of them cite high medical costs incurred by people newly enrolled under the Affordable Care Act.

“This year, health plans have a full year of claims data to understand the health needs of the [health insurance] exchange population, and these enrollees are generally older and often managing multiple chronic conditions,” said Clare Krusing, a spokeswoman for America’s Health Insurance Plans, an industry group. “Premiums reflect the rising cost of providing care to individuals and families, and the explosion in prescription and specialty drug prices is a significant factor.”

Poor Retail Sales Explained

Economists have been struggling to explain poor retail sales and the slump in consumer attitudes. All their models suggested consumers would increase retail spending thanks to the decline in gasoline prices.

The economists all forgot to factor in the Obamacare effect and rising rents. This is just round one.

For further discussion please see ...

• May 12: Household Spending Growth Expectations Plunge; Recession Already Started?
• May 13: Dismal Retail Sales Numbers Suggest Recession Likely Underway
• May 15: Consumer Confidence Plunges Below Any Economist's Estimate; Consumers Shock Economists

To wrap it up, please consider Why Are Economists' Predictions So Damn Awful?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Another US Foreign Policy Success: Isis Controls Half of Syria after Palmyra Seizure

Congratulations are in order for team Bush and team Obama for another stunning US foreign policy success: Isis Controls Half of Syria after Palmyra Seizure.

Fighters from the Islamic State of Iraq and the Levant (Isis) have seized the Syrian city of Palmyra, home to a Unesco world heritage site, putting nearly half of Syrian territory in the jihadi group’s hands and sparking fears that treasured antiquities may be destroyed.

Isis announced it had “complete control” of the city on Thursday, and state television said President Bashar al-Assad’s forces had withdrawn from the city, which is known to most Syrians by its Arabic name Tadmur.

Ancient Palmyra is known to the world for its iconic avenue of Roman columns, and was a cultural crossroad of the ancient world. The city dates back to the 1st century, when it was an oasis on a trade route linking eastern civilisations with the Roman empire. Its ruins lie to the southwest of modern Tadmur.

“Palmyra is an extraordinary World Heritage site in the desert and any destruction to Palmyra [would be] not just a war crime but . . . an enormous loss to humanity,” Unesco head Irina Bokova said in a video.

Isis has developed a reputation for destroying or selling cultural treasures. Earlier this year it filmed its fighters smashing Assyrian artefacts at sites in northwestern Iraq.

Moderate Rebels Defect

In case you are wondering how this happened, please consider this IBTimes report from March 7, 2015: US-Backed Moderate Syrian Rebels In North Defect; Obama Strategy Set Back.

It was supposed to be a crucial instrument of the Obama administration's aims in Syria, an ostensibly moderate rebel fighting force that would keep the pressure on the authoritarian regime in Damascus without aiding the ruthless jihadist forces that have captured much of the country. But the soldiers of Harakat Hazzm -- the first Syrian rebel group to receive arms from the CIA -- disbanded this week.

As a result, much of northern Syria is in the hands of the extremists, and the United States is left with no palatable ally in the area in the midst of a regional conflict that continues to spiral out of control.

Hillary Backs Moderates

Please recall that Hillary was in favor of backing "moderate" rebels.

But it is not just Democrats who want to back "moderates". Chief warmonger, Republican Senator John McCain, does as well.

Has anyone bothered to question if we are even backing the right person?

Iran is actually our ally here. Iran wants to help the US fight ISIS. The only problem is Iran backs Syrian president Assad, while the goal of the US is to overthrow Assad to alleged "moderates".

Roots of Crisis

This is exactly the kind of idiocy one can expect when you think you can "nation build".

Without a doubt the roots of this crisis date back to the inane decision by George Bush to invade Iraq. But please recall that Hillary was in favor of invading Iraq as well.

The non-amusing fact in this mess is the policies of George Bush, Obama, and Hillary Clinton are similar if not identical. Yet, Republicans blame Obama and Democrats blame Republicans.

The only candidate who has an alternative plan to this mess is Senator Rand Paul.

Contemplating Success

Some may ask "Mish, how the hell can you call this disaster a success?"

The answer is simple: In spite of what they may say, the goal of mainstream Republicans and Democrats is obviously perpetual war.

A destruction of a major historic site in Palmyra will have even some peacemongers clamoring for retaliation.

Make no bones about it, the takeover of Palmyra was a major US foreign policy success, provided you understand the goal.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Existing Home Sales Lower Than Any Economist's Estimate; Rising Supply a Good Thing?

Existing Home Sales Disappoint

Economists overestimated existing home sales today, rounding out another impressive day of overoptimism.

New home sales came in at a seasonally adjusted 5.04 million annualized rate.

The Bloomberg Consensus Estimate was 5.22 million. 5.04 million was below the lower end of the consensus range of 5.10 M to 5.32 M.

Existing homes sales are not living up to springtime expectations, down 3.3 percent in April to a 5.04 million annual rate which is just below the low-end Econoday forecast. Three of 4 regions show contraction in April with the sharpest decline, minus 6.8 percent, in the South, which is by far the largest housing region. Year-on-year, total sales are still up a respectable 6.1 percent.

Another positive is a rise in supply with 2.21 million used homes on the market vs 2.01 million in March. This rise, together with the drop in sales, raises supply relative to sales to 5.3 months from 4.6 months. And another positive is a 4.1 percent rise in the median price to $219,400 which is up 8.9 percent year-on-year.

But this report in sum is a disappointment, failing to point to any building momentum. Strength in the housing sector may be switching, from existing home sales to new home sales at least based on this report compared to the historic surge earlier this week in housing starts & permits. But housing data month-to-month are always volatile and, on net, it's too soon to decipher how strong the spring housing season is right now.

Existing Home Sales



Existing Home Sales Month's Supply



Rising Supply a Good Thing?

Bloomberg says "Another positive is a rise in supply with 2.21 million used homes on the market vs 2.01 million in March. This rise, together with the drop in sales, raises supply relative to sales to 5.3 months from 4.6 months."

That strikes me as circular reasoning, if not completely ridiculous. Month's supply will automatically rise when sales decline.

Supply rising in 2005 was a sign of a major problem coming up. Apparently it's different this time. The Goldilocks' theory, which I find absurd, is that low supply is what's holding back buyers.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Philly Fed Region "Weak but Stable"; Kansas City Region "Declines More Sharply"

More weak economic reports came out today. Let's take a look at two regional manufacturing reports.

Philly Fed Region "Weak but Stable"

The Bloomberg Economic Consensus for the Philadelphia Fed Business Outlook Survey was 8.0. Economists got the leading sign correct, but the consensus estimate was a tad high with the index posting 6.7.

Activity in the Mid-Atlantic manufacturing sector is slow but stabilizing, based on the Philly Fed's general conditions index which came in at 6.7 for May, down slightly from 7.5 in April and against Econoday expectations for 8.0.

The best news in the report is a slight uptick in new orders, to 4.0 from 0.7. This isn't searing but is at least in the plus column as are shipments, at 1.0 from minus 1.8. Employment, at 6.7, is also in the plus column.

Manufacturers in the region are reporting significant price contraction, especially in costs which is a surprise given the rise underway in oil prices. Manufacturers are also reporting declining prices for finished goods as well. These inflation readings, if repeated in subsequent reports, will give the edge to the doves at the Federal Reserve.

A plus in the report is a healthy reading of 33.9 for the 6-month outlook, down only slightly from April's 35.5 and up from 32.0 in March. The manufacturing sector, hit by weak exports and trouble in the energy sector, has yet to find its footing this year but this report, which is very closely watched, points to stability that in turn hints at a rebound in the months ahead.

Weak Demand

In light of rising energy prices, price contraction especially in finished goods tells the real story: very weak demand.

The six-month outlook is meaningless. Such readings are perpetually overoptimistic except at the bottom of recessions.

Industrial production will go nowhere with readings like these. I suggest things appear to be "stabilizing" before the next decline.

Philly Fed vs. Industrial Production




Kansas City Fed Consensus Way Too Optimistic

The range of economists' estimates for the Kansas City Fed Business Outlook Survey was -1 to +1. Economists were not even close on this one.

The early indications on May's manufacturing activity have been slightly positive, that is until the Kansas City Fed report where the composite index is in deeply negative ground at minus 13. This is the weakest of the recovery for this reading and follows an already weak minus 7 in April.

New orders this month are deeply negative, at minus 19, as are backlog orders at minus 21. These readings, reflecting contraction for export orders and trouble in the energy sector, point to significant trouble for the region's manufacturing activity in the months ahead.

Shipments are already in contraction, at minus 9, as is employment, at a deeply negative minus 17 that contrasts with mostly positive employment indications in other reports.

Kansas City Region "Declines More Sharply"

The Federal Reserve Bank of Kansas City reports Tenth District Manufacturing Declines More Sharply.

According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity declined more sharply in May and producers’ expectations also fell, with both reaching their lowest levels since mid - 2009.

“Factories in our region saw an even sharper decline in May than in March or April, as exports fell further and energy - related producers saw another drop in orders,” said Wilkerson. “However, firms’ overall still plan a modest in crease in employment over the next six to twelve months.”

The month-over-month composite index was -13 in May, down from -7 in April and -4 in March. The last time the composite index was lower was in April 2009. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The overall slower growth was mostly attributable to declines in durable goods manufacturing, including a continued decline in aircraft production and further weakness in metals and machinery. In addition, several nondurable goods plants also reported sluggish activity, particularly for plastics and food production.

Production fell most sharply in energy-producing states like Oklahoma and New Mexico, but it was also down in most other District states. The majority of other month - over - month indexes also decreased from the previous month . T he production index contracted from -2 to -13, and the shipments and new orders index es also fell. The order backlog, employment, and new orders for exports indexes edged higher but still remained well below zero. The finished goods inventory index increased from - 1 to 0, while the raw materials inventory index dropped into negative territory.

Recession in KC Region



If it appears the KC region is in recession, it's because it probably is. Nonetheless, favorable expectations six months out refuse to die.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

China Manufacturing PMI Contracts Third Month, Output Index at 13 Month Low

The slowdown in China continues as the HBSC Flash PMI shows Output contracts at strongest rate in just over a year.

Key Points

• Flash China Manufacturing PMI™ at 49.1 in May (48.9 in April). Two-month high.
• Flash China Manufacturing Output Index at 48.4 in May (50.0 in April). 13-month low.

Commenting on the Flash China Manufacturing PMI survey, Annabel Fiddes , Economist at Markit said: “The Flash China Manufacturing PMI pointed to a further deterioration in operating conditions in May , with production declining for the first time in 2015 so far. “Moreover, softer client demand, both at home and abroad, along with further job cuts indicate that the sector may find it difficult to expand, at least in the near - term, as companies tempered production plans in line with weaker demand conditions. “On a positive note, deflationary pressures remained relatively strong, with both input and output prices continuing to decline, leaving plenty of scope for the authorities to implement further stimulus measures if required.”

The positive note is "deflationary pressures are strong so that leaves scope for stimulus." Isn't that a hoot?

And if there was strength, that would be a positive as well. I guess it's simply impossible for things not to be bullish.

Two Point Summary

1. Economy weak - stimulus needed - stimulus is bullish
2. Economy strong - no stimulus needed - also bullish

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Morley the Robot Master Chef; Cognitive Cooking

Want Lobster bisque? Morley, the robot master chef can cook that up for you in about 30 minutes.



Please consider Robot Master Chef Cooks 2,000 Recipes, Cleans Up, Does the Dishes.

A California company, Morley Robotics, has teamed with the UK’s Shadow Robot Company, to develop a smartphone-controlled robot master chef capable of cooking world-class fare just as Chef Watson. The robot was unveiled at a recent event at Hanover Messe Robotic Technology Fair in Germany. The Robot Chef created a “lobster bisque” for the event in about 30 minutes.

The Morley Robot Master Chef, the product of over two decades of research and development, has two robotic hands, each containing 24 motors, 26 micro-controllers and 129 sensors. The arms have been designed and programmed to match the movements of a professional human chef. Owners will still have to lay out ingredients, but once that’s done the robot will do the rest, including cleaning up and washing the dishes.

As Chef Ramsay has shown on his TV shows, many restaurants simply have terrible chefs. Soon, restaurant startups may be able to rent a Morley robot chef to train their human cooks in how to prepare palatable food. The world may become a better place if restaurant owners are able to get rid of temperamental “prima donna” chefs.

Morley Video



Want New Recipes?

If you want new recipes, just team up Morley with IBM's Watson, the computer that trounced everyone at the game of Jeopardy.

IndustryTap reports IBM’s Watson Has A New Gig: World Class Chef

Earlier this year, IBM’s Watson computer teamed with New York’s Institute of Culinary Education. Watson and his handlers are now creating recipes that combine ingredients available to humans the world over in novel ways, raising eyebrows in the process. One of Watson’s creations was the Austrian Chocolate Burrito.

The biggest knock against Watson was that (s)he wasn’t creative and so this became a challenge for IBM engineers to overcome. The team set out teaching Watson about existing data on food, human proclivities and cooking techniques.

With thousands of ingredients to choose from and a “knowledge” of how ingredients are typically combined, Watson has gone off the beaten path and come up with mind-boggling recommendations for new dishes that are getting rave reviews.

Cognitive Cooking



Watson on the Road

To show the creative cooking power of Watson, IBM took the show on the road.



Cognitive Cooking - IBM Watson (Image Courtesy www.satelliteoffice.tv)

Chefs? Who needs em?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

LA to Gradually Hike Minimum Wage to $15 by 2020; Already Weak Growth Prospects Just Got Worse

In yet another triumph of stupidity over common sense, a triumph that is sure to cost jobs, slow growth, and encourage more robotic replacement of workers, Los Angeles' Minimum Wage on Track to go up to $15 by 2020

The Los Angeles City Council on Tuesday backed a plan to raise the city’s minimum wage to $15 per hour, joining a trend sweeping cities across the country as elected leaders seek to boost stagnating pay for workers on the lowest rungs of the socio-economic ladder.

Lawmakers agreed to draft an ordinance raising the $9-an-hour base wage to $15 by 2020 for as many as 800,000 workers, making L.A. the largest city in the nation to adopt a major minimum-wage hike. Chicago, San Francisco and Seattle already have approved similar increases, and raising the federal minimum wage has moved to the forefront of the Democratic Party’s agenda.

The first wage boost — to $10.50 per hour — to take effect in July 2016.

Some labor leaders have expressed dissatisfaction with the gradual timeline elected leaders set for raising base wages. But on Tuesday the harshest criticism of the law came from business groups, which warned lawmakers that the mandate would force employers to lay off workers or leave the city altogether.

“The very people [council members’] rhetoric claims to help with this action, it's going to hurt,” said Ruben Gonzalez, the Los Angeles Area Chamber of Commerce’s senior vice president for public policy and political affairs.

He predicted that many businesses would absorb their new labor costs by laying off employees, reducing work hours or moving out of the city entirely.

“It's simple math,” Gonzalez said. “There is simply not enough room, enough margin in these businesses to absorb a 50-plus percent increase in labor costs over a short period of time.”

Councilman Mitchell Englander, the council’s only Republican, cast the lone opposing vote. In a statement, he said the council action could “make it impossible for entire industries to do business” in Los Angeles.

“The very last thing that we should be doing as a city is creating a competitive disadvantage for our businesses with those in neighboring cities,” said Englander, who represents the northwest San Fernando Valley.

The council plan approved Tuesday would raise wages higher than the mayor’s proposal, albeit more gradually. Businesses and nonprofit groups with 25 or fewer employees would have until 2021 — an extra year — to comply. Some nonprofits that train and rehabilitate disadvantaged workers, such as the homeless or former gang members, could also take advantage of the extension.

After that, yearly wage increases would be pegged to the consumer price index — a key provision of the law that backers say addresses past failures to adjust the minimum wage for inflation. Opponents said automatic pay increases based on inflation would be a further hit to businesses.

Simple Math

I side with Gonzalez on the "simple math" and Englander on competitive disadvantages.

This move is 100% guaranteed to cost jobs. Proponents of such measures inevitably say things like "studies show that hikes in minimum wages don't hurt employment."

Such studies only look at the "seen". Population trends and productivity have kept growth intact. Employment rose in spite of hikes in minimum wages, not because of those hikes.

The obvious fact is many struggling businesses will go under. That effect will be seen, but perhaps small. What we won't see is how many stores, businesses, and franchises will not open because of labor costs.

And it's hard now to estimate the push on businesses to further automate, but wage and benefit hikes pressure businesses in that direction.

Experiment Guaranteed to Fail

Councilman Paul Koretz said "This is an experiment. If anyone tells you they know exactly how this is going to go … they’re not being honest with you."

Well, I don't pretend to know "exactly" how this is going to go. But I do know the consequences will be slower growth, fewer stores, and higher unemployment than there otherwise would be.

San Francisco Chronicles 

San Francisco recently hiked the minimum wage to $15. In immediate response, Borderlands Books announced it would close.

A second bookstore owner, Brian Hibbs, owner and operator of Comix Experience, an iconic comic-book and graphic-novel shop on San Francisco’s Divisadero Street and supporter of the wage hike had second thoughts once he saw the math.

Hibbs calculated that the $15-an-hour minimum wage will require a staggering $80,000 in extra revenue annually. The amusing thing is Hibbs describes himself "progressive capitalist".

“We’re for a living wage, for a minimum wage, in principle. But I think any law that doesn’t look at whether people can pay may not be the best way to go," says Hibbs.

For icing on the hypocrite's cake, Hibbs asks "Why can’t two consenting people make arrangements for less than x dollars per hour?"

Progressive Capitalism?

I wrote about Hibbs in Capitalism for Me, Socialism for Thee; Progressive Capitalism?


There is no such thing as "progressive capitalism". The idea is as ridiculous as being a Jewish Christian Atheist.

In response to Capitalism for Me, Socialism for Thee, several readers said businesses can just raise prices.

For books that have a set price, it's not that easy. But even in cases where stores can raise prices, what about the decline in traffic?

Already Weak Growth Prospects Just Got Worse

Fast food dining and retail shopping is not price inelastic. The cost of fast food is already prohibitive. So hiking prices is 100% guaranteed to cost some traffic.

The bigger unseen is store expansion. Rising labor costs will have every business cutting expansion plans over what they would have done in the absence of these wage hikes.

Economic common sense is all it takes to realize that already weak growth prospects just got a lot worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com