Wednesday, December 11, 2013

The Death Of Services Pricing Power

The following chart shows the consumer price index for services divided by the consumer price index for nondurables.

Click to enlarge.

Goodbye service economy tailwinds.
Hello service economy headwinds.

Perhaps Bernanke can give our service economy some inflation but he sure can't seem to target where it goes. As seen in the chart, we eventually managed to get back to the trend line in the aftermath of the 1970s. We're sure making feeble progress these days though. Fantastic. Get out the party hats.

In fact, I am not confident that we will ever return to the trend line. This is yet another epic exponential growth failure. Using the power of future hindsight, we might even consider ourselves fortunate if we can maintain present levels. Sigh.

Why is this bad? When nondurables rise in price faster than services then this service economy's many, many service employees get the short end of the stick (even less stick than they currently think they are getting).

Durable good

Examples of nondurable goods include fast moving consumer goods such as cosmetics and cleaning products, food, fuel, beer, cigarettes, medication, office supplies, packaging and containers, paper and paper products, personal products, rubber, plastics, textiles, clothing and footwear.

While durable goods can usually be rented as well as bought, nondurable goods generally are not rented.

Nondurables are generally not rented yet? Say what? I sense a business opportunity!

May 4, 2012
Renting Prosperity

Americans are getting used to the idea of renting the good life, from cars to couture to homes. Daniel Gross explores our shift from a nation of owners to an economy permanently on the move—and how it will lead to the next boom.

Rent the good life! Premium Gasoline! Beluga Caviar! Gurkha Black Dragons! Samuel Adams' Utopias! Lucentis! The Nondurable Rental Corporation of America will fulfill all your nondurable rental dreams and then some with low, low payments amortized over your remaining expected lifespan (with only modest surcharges of course)!

Have I mentioned lately that I'm a permabear? This is not investment advice. It's a business opportunity! Tap those severely tapped consumers before they are entirely tapped-out again! What could possibly go wrong? Genius!

In the epic battle between health care services, college education services, and nondurable fuel prices, which pain will ultimately reign supreme? Stay tuned! It's sure to be a hoot!

Source Data:
St. Louis Fed: Custom Chart


Stagflationary Mark said...

Rent to Own Gasoline

When you absolutely, positively need a gallon of gasoline to get you to your minimum wage service economy job!

Gallon must be renturned within 24 hours or you will be responsible for all late fees. Option to purchase is an additional charge for those who are unable to return rented gasoline due to theft or usage.


Rob Dawg said...

We only have a service economy because resources have gotten too cheap to meter.

Stagflationary Mark said...

Rob Dawg,

With 7 billion on this planet and the accelerating rise of automation, I would not rule out a reversal of that trend. Humans can get too cheap to meter too. How much will the human burger flipper make when machines are fully flipping burgers? Not much.

Just an opinion of course.

Rob Dawg said...

Since it is topical, a peek at my chart of tomorrow:

Real HHold Income vs U-6

Stagflationary Mark said...

How much does Amazon's typical human retail salesperson make? I can't answer that one. I've made quite a few purchases from Amazon but I've never spoken to an Amazon human retail salesperson. My computer talks to their computer.

I don't speak to employees at gas stations very often. I just slide my card and pump my own gas. The same thing applies in the grocery store's self serve checkout.

That's not the way it always was of course. I don't think these trends are ideal for long-term job creation, although some would argue we'll make it up somewhere else just because we always have in the past. I am not convinced though. Horses sure never made it up when the auto was introduced. They just became obsolete.

Just something to think about (and I think about them often).

Stagflationary Mark said...

Rob Dawg,

As for your chart, real median household income can't stay at 1995 levels forever!

I think everyone can agree on that. There's a lot of volatility, lol. Sigh.

Gallows humor. Deep sigh.

Rob Dawg said...

I loved that commercial!

Year? Guesses? Not even this century. 1999.

Rob Dawg said...

...real median household income can't stay at 1995 levels forever!

Sure it can: More workers per household.

Rob Dawg said...

Also, "Real HHold Income", notice the classic Pig™ Formation.

mab said...

Why can't the foreigners that make so many of our non-durable goods just be happy with their third world lifestyles?

Like we can afford their rising wages. Don't they know we're tapped out?

This sucks!

Troy said...

The beauty of a pure service economy is that the GDP of it can stack upon itself quite a lot, with only human fatigue and the hours of the workweek limiting output. (E.g. the piano teacher exchanging labor with the window washer with the car mechanic -- without materials costs, this labor exchange chain can cycle indefinitely in a local economy).

It's the materials costs that introduce "friction" in the service economy, bleeding wealth out of every local economy as service providers have to part with cash to pay for their suppliers.

As for renting, I only figured out after renting half my adult life in college and japan (~$120,000) that it doesn't matter what you rent, only what you own.

I paid an extra ~$300/mo for 5 years to be 20 minutes closer to work, primo area (Tokyo's best, actually), and a view of Tokyo tower.

Idiot. Back in the 1990s I coulda been buying an ounce of gold each month with that!

Stagflationary Mark said...

Rob Dawg,

The video:

You forgot your [paper] receipt? That's so 1999!

Thank you for going paperless! ;)

Stagflationary Mark said...

Sure it can: More workers per household.

Horses on treadmills cranking out cheap energy and grazing on the rich neighbor's manicured lawn and drinking from their pool (late at night of course)! Prosperity, baby! Ha!

Stagflationary Mark said...


Speaking of non-durable goods and sucks, I'm reminded of our replacement Hoover vacuum cleaner that burned out in a flash of light and a plume of smoke in a most spectacular fashion within 6 months of purchase. Thank goodness Costco has a great return policy. That was nearly a decade ago if memory serves.

Went with a much pricier durable German vacuum (Sebo) in the pyrotechnic aftermath. Still going strong! Still sucking great! House hasn't burned down anyway, lol.

Stagflationary Mark said...


I paid an extra ~$300/mo for 5 years to be 20 minutes closer to work, primo area (Tokyo's best, actually), and a view of Tokyo tower.

Perhaps it was worth it. I look back at my brief time paying extra to live in an apartment overlooking the Seattle waterfront with mostly fondness (the noise level and air quality being my complaints).

Okay, sure. My current house has appreciated since I bought it in 1997 but...

New roof.
Exterior painted.
Some appliances replaced.
Needs new oven and stove.
Needs new furnace.
Needs interior painting.
Needs new carpets.
Needs new windows.
Needs new garage door.
The list never really ends.

It's technically a depreciating appreciating asset if you know what I mean. Could depreciate considerably during the next earthquake and/or volcanic eruption too. And let's not forget those accumulated property taxes and how much of this appreciation is just inflation.

Oops. Debbie Downer moment. ;)

Stagflationary Mark said...

And when I say it needs a new stove, I mean it's 20+ years old and only two of the four burners work.

I have been frugally procrastinating because the stove is built into the countertop. Not looking forward to the cost of upgrade.

The oven is built into the wall. Its microwave no longer works. We have a cheap portable one though, so no big deal.

Some might argue that I need to maintain my house better. Define better. The sooner I replace them the sooner the new ones will fail. Two working burners may not be optimal, but they are sufficient. There are just to of us.

As for new carpet, I'm relatively indifferent. We don't entertain people who would care. No formal dinners here. It's not like our two dogs care either! ;)

Rob Dawg said...

Electric or gas? If gas ignition or flame issue? Those are all wickedly cheap fixes.

Even counter drop stovetops are cheap.

Stagflationary Mark said...

Rob Dawg,

Electric. Two of the variable knobs only know on and off now. Turn one on a bit, get full heat. Not good! It's too old to fix anyway, really on its last legs.

Looked for a replacement stove years ago. Couldn't find one to match the hole. It's not one of the standard sizes apparently. The burners can come out and there's a grill that goes in its place, not that we've ever used it.

Not sure how easy the oven is to replace either. I doubt it is a standard size either, but I've never looked into that. It still meets our needs (other than the microwave of course).

In any event, nothing is cheap compared to my girlfriend's current salary ($0).

Sustainable Gains said...

The notion that houses are an investment is one of the great bubble myths of our age.

With that said, I will comment that there are tremendous intangible values to having a well-maintained home. I have had a totally frugal, don't-fix-it-unless-we-really-need-it mindset since about 2002. In fact, according to PG&E (SF Bay Area), we use half the energy of a "typical" home our size. The only major thing we fixed in about the past 5 years was a leaky roof.

But you know, while that mindset saves a lot of money (which can then be invested to make more money), it also eventually wears on your spirit. When you're surrounded by stuff that doesn't quite work right, you view the world a different way and behave differently than when everything just feels good around you. Maybe it's like working for the government or like "working for The Man", instead of working for oneself. In the same was as Mark mentioned above, I think it might even contribute to aging, actually.

This year, thanks in part to prodding from my wonderful wife, we switched to a "keep our place in top shape within a fixed maintenance budget" mindset. We set up a monthly budget and then we started working on whatever was annoying us most, once we'd saved enough to go do it. The old, too-small fridge is now a new, much larger, much more energy efficient model. The dying clothes washer is gone. And so on.

Even though we're spending money, all of the changes are valuable in nonfinancial ways. Even better, some of those ways translate into better financial values through channels you don't normally think about. Fixing problems and seeing positive results is self-reinforcing, it creates even more "can-do" spirit. That translates into good things at work, and at home we have more joy-of-life and less humdrum routine. And I think that finding a more joyful balance-of-life also leads us to more rational investment choices, which means even though we're spending money we're actually balancing out financially as well.

So while I'm on board with frugal, and using only what you really need, I also think stuff that's broken should get fixed, because it'll help you live longer and enjoy the trip a lot more.

Stagflationary Mark said...

Sustainable Gains,

So while I'm on board with frugal, and using only what you really need, I also think stuff that's broken should get fixed, because it'll help you live longer and enjoy the trip a lot more.

In theory, I would agree with you.

In practice, I don't have the money available to fix much these days. It's tied up in long-term TIPS and there's no way I'm going to cash it out early unless I have to.

My girlfriend hasn't had a job in 4 years or so and my cash burn rate is therefore already much higher than I would like it. Hopefully that will change at some point.

Doesn't help that I spent $12k on our dog Honey's health care in the past 12 months. For what it is worth, that's a much higher priority to me than a new stove. We've already lost one pet this year (our cat).

Fortunately, the dog's care appears to be money fairly well spent. She went in for blood work in the past week and her liver values are near normal. The vet considered the results exceptional based on all the dog's been through. Could easily live out her full life thanks to the surgery. Whew!

Priorities, priorities. Can't afford to do all the things I would like, but that's okay.

Stagflationary Mark said...

I would also point out that I do not shed a tear over two broken burners on the stove.

I consider myself fortunate to have two that work. No joke.

That's two more than many in this world have. It's all relative.