Thursday, May 31, 2012

April Restaurant Index Above 100 for 6th Month

"The outlook for the restaurant industry remained positive for the coming months, as the National Restaurant Association’s Restaurant Performance Index (RPI) stood well above 100 in April. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.6 in April, down 0.6 percent from the strong level of 102.2 registered in March. Despite the decline, April represented the sixth consecutive month that the RPI stood above 100 (see red line in chart above), which signifies expansion in the index of key industry indicators.

Although the Restaurant Performance Index dipped somewhat in April, it remained solidly in positive territory. Restaurant operators reported positive same-store sales for the 11th consecutive month, and a majority of them expect business to continue to improve in the months ahead.

 The Expectations Index, which measures restaurant operators’ six-month outlook for four industry indicators (same-store sales, employees, capital expenditures and business conditions), stood at 102.2 in April – down slightly from a 15-month high of 102.4 registered in March (see red line in chart). April also represented the eighth consecutive month that the Expectations Index stood above 100, which signifies a positive outlook among restaurant operators for business conditions in the coming months."

MP: Further evidence of an improving outlook for U.S. restaurants is provided by Census data showing that sales for "Food Services and Drinking Places" were up by 8.5% in April from a year earlier, following a 7.4% increase in March.  After being flat in 2008 and 2009, sales at "food services and drinking places" are now 17% above the June 2009 level when the recession officially ended, and set a new monthly record high (in both real and nominal dollars) of almost $44 billion in April.  

Moreover, sales at "Full Service Restaurants" set a new monthly record high (both nominal and real dollars) of $20.4 billion in March, and were up by 13.1% year-over-year, following a 13.7% increase in February. The relevant data suggest that the restaurant industry has made a full recovery from the recession and is now operating back above pre-recession levels for inflation-adjusted sales. Regardless of how consumers answer confidence survey questions, the strong improvements in restaurant sales and the RPI in recent months would indicate that tracking actual consumers spending on restaurant meals is reflecting a high level of consumer confidence. 

64 Comments:

At 5/31/2012 3:22 PM, Blogger Moe said...

There were comparisons made earlier in the year that claimed rising grocery prices made eating out "affordable". Probably still the case...?

 
At 5/31/2012 3:52 PM, Blogger morganovich said...

moe-

actually, in the most recent CPI food away from home had higher inflation that food at home.

3.3% was the reported number. personally, i suspect that that number is only about half of what that rate actually is as the substitution effects on food are incredibly pronounced particularly as the most inflationary foods (like ribeye) get taken out and replaced with cheaper foods like flank steak and with reductions in grade.

this is a part of the CPI in which i have particularly little faith.

by suspicion is that nearly all these restaurant gains are coming from price.

traffic at us reservation taking restaurants was only up 2.4% in the first quarter. (down from 3.5% in 2011)

unless dining pattens changed very dramatically (a questionable assumption) then most of this is price.

"The Wall Street Journal cites data from the food research firm Technomic, revealing that beef prices have increased 30% over the past two years, including a 10% rise from February 2011 to February 2012"

http://moneyland.time.com/2012/03/26/wheres-the-beef-expect-less-meat-higher-prices-at-steakhouses/

we have seen big jumps in seafood prices and lots of other restaurant staples.

even lowly chicken is forecast to have 20% price hikes in 2012 after being up 8% per pound over the last 12 months.

with so many key restaurant foods up 8-10% and more, if prices are up only 3.3% as CPI claims, one would expect serious margin compression, but that does not seem to be happening.

this leads me to believe that cpi is significantly understating the price hikes at restaurants.

if traffic is up 2.5% and sales up 13%, then 8-10% inflation fits quite well with the numbers (assuming how much you order and eat has stayed constant).

i suppose you could claim it's diners eating extra dishes, more and better booze etc, but i have no seen any evidence that this is the case.

 
At 5/31/2012 4:07 PM, Blogger Moe said...

you could claim it's diners eating extra dishes, more and better booze but i have no seen any evidence that this is the case.

Come watch me eat!

We are quite lucky as our little town offers up not much more than a McDonalds' - so temptations are non-existent.

 
At 5/31/2012 4:11 PM, Blogger PeakTrader said...

Morganovich says: "if traffic is up 2.5% and sales up 13%, then 8-10% inflation fits quite well with the numbers."

Workers are satisfied with 3% raises, while inflation is "8-10%", and yet demand is up substantially?

Perhaps, Morganovich believes businesses should replace the existing workforce (e.g. with unemployed teens, high school dropouts, etc.), or just fire workers, because the employed are contracting the economy, by a huge margin each year.

 
At 5/31/2012 4:35 PM, Blogger morganovich said...

peak-

was that intended to make sense?

first off, i said 8-10% for main entree foods at restaurants.

look them up yourself.

prime beef 10%+

chicken 8%%

etc etc.

that is what drives restaurant prices.

http://moneyland.time.com/2012/03/26/wheres-the-beef-expect-less-meat-higher-prices-at-steakhouses/

when the price of the steak on your plate jumps $10, veggie costs could go to zero and you are still seeing a big jump.

wine prices are running at 7-12% increases as well.

i realize you claim to live in a magic place where food never goes up in price, but the rest of us are NOT seeing that and the aggregates and industry data do not show it.

when i see a massive gap between what winemakers and restaurants on one hand and the BLS on the other are saying about price, i'm going to side with the former. they are not playing games with the numbers and, contrary to BLS assumptions, they know their customers do not value choice flank steak like prime ribeye.

you final comment is just strange gibberish. it does not even make sense.

i think the fed should stop growing money supply at 10-12%. that's the problem. it's driving inflation and harming the economy.

i don't think it's a coincidence that if you take money supply growth 10% and multiply it by restaurant traffic 2.5% you get 1.1 X 1.025 = 12.75% growth, about the nominal figure the restaurants are reporting.

there are only 2 ways you can get to a 13% jump from a 2.5% increase in traffic. people either need to eat more per sitting or they need to pay higher prices.

if you have some data that people are eating more instead of paying more, trot it out, but traffic is only up 2.5%, down from 3.5% last year and if they are not, it's price.

http://nrn.com/article/index-year-over-year-restaurant-traffic-growth-slowed-1q

how is it all this money does not reduce the value of money? how can you up money supply in the double digits to drive 2% real growth and 3% inflation? that's some pretty magical thinking. note the the hikes in prime beef and in chicken prices look quite a bit like money supply growth too. amazing how all the pieces start to fit together once you stop manipulating the data so badly.


try reading this:

http://www.huffingtonpost.com/david-einhorn/fed-interest-rates_b_1472509.html

and you'll see what i mean about rates and money supply.

 
At 5/31/2012 4:46 PM, Blogger morganovich said...

http://www.seafoodbusiness.com/articledetail.aspx?id=14501

seafood up 7.2% last year.

so that's the big 3, beef, chicken, fish, all showing 70-10% hikes in price.

so tell me, how does that not flow through to entree prices?

perhaps you trust fitch on the topic?

"Fitch expects U.S. restaurant food and beverage costs to remain a headwind in 2012, rising by 5% or more for a second year in a row. Large chain restaurants, however, are in a good position to fend off significant margin erosion through modest same-store sales growth, menu management, and heavy reliance on low-cost franchising.

We expect food inflation pressure to be driven in particular by rising protein prices. The latest USDA commodity price forecast calls for 2012 beef and chicken prices to increase by 9% and 5%, respectively, following a year of double-digit price increases for many food items in 2011."

seems like everyone but the bls (and you) sees this food inflation.

 
At 5/31/2012 5:01 PM, Blogger PeakTrader said...

Morganovich, obviously, consumers are finding bargains. That's why they're buying, even with low wage increases and high unemployment.

 
At 5/31/2012 5:15 PM, Blogger morganovich said...

peak-

that's a strange statement.

finding bargains? why? how? what evidence do you have of that? how are you defining "bargain"?

consumers are trying to behave as they always have and go out to eat. it's habit. it's a priority.

that said, restaurant traffic is still down over 8% from 2007.

http://www.wbtv.com/story/18434659/opentable-introduces-restaurant-industry-index?clienttype=printable

perhaps the bargains are not as attractive as you thought? one might almost wonder if high prices were keeping demand down.


us population grows 4% and restaurant traffic drops 8%. that's quite a per capita drop that seems inconsistent with "bargains".

 
At 6/01/2012 2:15 AM, Blogger PeakTrader said...

Also, Morganovich says: "how can you up money supply in the double digits to drive 2% real growth and 3% inflation? that's some pretty magical thinking."

Excess Reserves is high and Velocity of Money is low:

http://research.stlouisfed.org/fred2/series/EXCRESNS

http://research.stlouisfed.org/fred2/series/MZMV

Moreover, productivity growth is disinflationary.

http://research.stlouisfed.org/fred2/graph/?id=OPHNFB,

 
At 6/01/2012 6:35 AM, Blogger VangelV said...

Workers are satisfied with 3% raises, while inflation is "8-10%", and yet demand is up substantially?

There is no real income growth in the US. Demand is coming from credit growth and government transfers.

Funny how Mark tends to miss all of the big negative reports and is oblivious to the fact that the Fed is so worried about the economy is rolling over before the election that another QE operation is almost inevitable.

 
At 6/01/2012 6:50 AM, Blogger Larry G said...

I never see the NYT Economix referenced here in CD but I was curious what folks thought of this:

" Is a decrease in the federal budget deficit good or bad for jobs and growth in the American economy? This deceptively simple question confuses thousands of students who enroll in introductory economics every year, and it will undoubtedly confuse millions of voters this year."

http://economix.blogs.nytimes.com/2012/06/01/confusion-about-the-deficit/

 
At 6/01/2012 7:51 AM, Blogger Jet Beagle said...

morganovich: "so that's the big 3, beef, chicken, fish, all showing 7-10% hikes in price.

so tell me, how does that not flow through to entree prices?"


Although costs vary by type restaurant, food costs should be about 28 to 32 percent of total sales. If labor, liquor, energy, lease, and other costs are not rising, a restaurant need only raise entree prices 2 to 3 percent to cover the 7 to 10 percent food inflation. Also, it's possible that other food items are not increasing as much as beef and seafood.

 
At 6/01/2012 8:00 AM, Blogger Jon Murphy said...

I never see the NYT Economix referenced here in CD but I was curious what folks thought of this:

I think cutting the government deficit would have short-term consequences and long-term benefits. I'll not address the article specifically, but rather the ideas behind it.

A reduction in the size of government deficit would initially pressure any economy: people are getting laid off, you'd have a reduction on government demand which could hurt industries like the defense, paper, alternative energy (assuming across the board cuts). Additionally, the increase of taxes would pressure the purchasing power of consumers and businesses.

That being said, this is hardly an argument to keep deficit spending. Rather it's an argument for slow, steady and predictable cuts to government, rather than massive gouges.

But how one reduces the deficit is also important. Reductions to the deficit through only tax increases will only harm economic growth. However, reductions to spending will provide long term benefits. Remember that all resources are scarce: there is only a certain number that can go around. Governments tend to use resources for projects that people deem not valuable (alternative energy), or in a national interest that the market may not be able to provide (national defense). By reducing spending, it allows resources (land, labor, capital, entrepreneurship) to be diverted to more valuable projects, thus spurring economic growth. Of course, this process does not happen over night. It's easy to look at the short-run benefits of deficit spending and conclude that we should never cut spending significantly because the long-run is always in the future. But this is not only bad economic policy, it's a misapplication of Keynes' lessons. Keynes' argument was that, for the most part, markets should be left alone. However, in the case of recessions, the government can/should step in with deficit spending to correct the ship. Then, when the economy is healthy again, government should remove itself from the process.

That's just my thoughts. I will say one thing, though. The CBO is right: if taxes go up next year, we will likely slip into recession. The US economy is improving and getting stronger, but we would not likely be able to handle the highest overall tax rate in at least the past 50 years.

 
At 6/01/2012 8:05 AM, Blogger Jet Beagle said...

morganovich: "that said, restaurant traffic is still down over 8% from 2007."

The website you provided refers to an index of 8,500 reservation-taking restaurants. I assume that includes only higher-end restaurants but not restaurants such as Chili's or Friday's.

Have you seen any data showing that restaurant traffic at all restaurants is down 8% from 2007?

 
At 6/01/2012 8:09 AM, Blogger morganovich said...

peak-

those arguments do not actually make much sense.

productivity, in particular, tends to get calculated using CPI, so the whole argument is circular.

under estimate inflation, so you over estimate productivity which then gets used as an explanation for low inflation.

velocity of money has not dropped anything like enough to soak up money supply growing at more than 2X nominal growth (and more like 4x in recent years).

one of the reasons i have so much confidence that the current cpi figures are wrong is the fact that my econ models all work with the old numbers but do not fit together with the new ones.

i don't know if you read that einhorn piece i linked, but he raises a very interesting point on inflation (and fwiw he believes as i do that cpi reads much too low which is why he launched a fund backed entirely by gold a few years back).

his point was this;

"Some will argue that if the Fed raises rates, it will cause deflation. Just the word 'deflation' makes Chairman Bernanke break into a cold sweat and reach for the Jelly Donuts. Fear of deflation should depend on what, exactly, is deflating.

The sort of deflation that puts pressure on wages is a clear negative, as it leads to a lower standard of living. On the other hand, lower prices caused by scientific progress and higher efficiency are unambiguously positive.

Apple's newest iPhone has twice the memory, a better camera, and other small improvements and carries the same price as the prior version. Government statisticians see an improved product at the same price and count it as a price cut, or deflation.

There is no reason for the Fed to conduct monetary policy to offset advances that improve our standard of living, in particular when it results in driving up the price of something else, like oil.

Yet, while the Fed seems compelled to respond to innovation as if it were a bad thing, it throws up its hands when confronted with rising oil prices. Unfortunately, when the Fed sets policy with a goal of driving prices higher, it doesn't get to choose which prices are most affected.

When asked about the rising oil price, Chairman Bernanke concedes that it is a negative for consumers. He then disclaims any responsibility, and states it is beyond the power of the Fed to affect it. He blames oil prices on emerging markets, political turmoil and speculators. If we take him at his word that speculators are causing the problem, it's worth considering what might be causing the speculation."

i find that argument that quality adjustments create really bad monetary policy quite persuasive.

add to that the fact that most of the geometric adjustments wind up having the wrong sign because price is driven by demand shifts not supply driven price shifts driving demand, and it's not hard to see why cpi is a mess.

it is not a coincidence that our monetary policy has been so out of whack since the mid 90's and we have had bubble after bubble. we took our kmph speedo and replaced it with mph, but never changed the way we drive and act like 100 mph is 100 kph. that's going to have some perverse results.

 
At 6/01/2012 8:18 AM, Blogger Larry G said...

thanks Jon for your thoughts...

here's another along the same lines:

http://economix.blogs.nytimes.com/2012/05/29/republican-keynesians/

 
At 6/01/2012 8:23 AM, Blogger morganovich said...

jet-

as far as i know, that index mirrors "full service restaurants" pretty closely.

NPD says us restaraunt visits dropped from 62.7mm in 2008 to 60.6mm in 2011, a 3.3% drop which i imagine is larger vs 2007 though i do not have the data, but it would not surprise me to see a 3%-4ish drop from 2007-8 putting it close to the opentable numbers.

http://www.prweb.com/releases/2012/2/prweb9217120.htm


note that these are the numbers for all restaurants.

the figures for casual dining and for midscale are much worse.

https://www.npd.com/press/releases/press_090720.html

for 2009 alone :"Casual dining declined -4 percent and midscale was down -6 percent."

that midscale number look a lot like the opentable number.

mark has been excited about the big growth in "full service" restaurants, but that looks to be the area with the steepest drop in traffic and, barring major changes in how people order and eat, the area with the highest inflation. price looks to be driving 3 -4x as much of the increase as traffic in that space.

that certainly foots with my personal experience. i travel a fair bit and have noticed food prices climbing sharply when i eat out.

a midscale dinner for 2 with a bottle of wine was $150 in sf just 2 years ago. it's $200 easy now.

park city is even worse with dinner for 2 at a place like prime steakhouse easily hitting $300.

i have seen the same in manhattan, chicago, LA, san diego, san jose, and don't even get me started on london.

granted, this is hardly a statistically valid sized sample set, but it does foot with the data i am seeing.

this is making me want to go through old expense receipts to see if i can map a trend. not sure how to normalize meals, but may give it a lash just for fun.

 
At 6/01/2012 8:29 AM, Blogger morganovich said...

"Although costs vary by type restaurant, food costs should be about 28 to 32 percent of total sales."

this is not true as you go higher end. food is more like 50% and it jumps to more like 70-80% if you add wine. (which is up double digits as well) (i have been part owner of a restaurant in SF and that's how our costs looked. i'm sure mcdonalds is different, but i was really focusing on the full service category here)

take a look at the article i linked that talks about adding $10 a plate to ribeye prices.

add in the fact that rents re up 6-7% nationwide and that's the vast majority of costs.

servers are paid little but tips.

it's just the line that really gets paid much cash.

i have been away from the biz for a few years but will ask my friends who still run the place what they are seeing in costs (though granted sf is not the most representative market)

 
At 6/01/2012 8:30 AM, Blogger morganovich said...

fwiw-

today's jobs number not likely to help going forward.

69k? yeech. not pretty. worst number in over a year.

 
At 6/01/2012 8:45 AM, Blogger Jet Beagle said...

morganovich: "this is not true as you go higher end. food is more like 50% and it jumps to more like 70-80% if you add wine. (which is up double digits as well) (i have been part owner of a restaurant in SF and that's how our costs looked."

The 28 to 32 percent figure I provided was from the link I provided to Baker Tilly Virchow Krause, one of the nation's largest public accounting firms. They claim to be specialists in restaurant accounting.

Food costs may have represented 50% of sales at your restaurant. But that's not common at all in the industry.

 
At 6/01/2012 8:46 AM, Blogger Jet Beagle said...

morganovich: "i have been away from the biz for a few years but will ask my friends who still run the place what they are seeing in costs"

Don't bother. I doubt anyone is going to take anecdotal evidence over industry statistics.

 
At 6/01/2012 9:39 AM, Blogger morganovich said...

jet-

it is common in the industry if you look at full service and midscale restaurants.

the number you are citing comes from including taco bell, kfc, etc.

food costs there are tiny.

but as you move upscale, the rise dramatically.

i have been speaking about the full service segment here, not fast food.

 
At 6/01/2012 9:47 AM, Blogger morganovich said...

jet-

regardless, how do you get from 2.5% traffic increases to 13%+ rev increases without big price hikes?

are you proposing that consumers have dramatically changed their eating habits in the last year and are buying more food per meal?

if you have some evidence that this is the case, i'd happily look at it, but i am not aware of any and a 10% jump in food eaten per head in a year seems like big change.

to accept a claim that extreme, i'd want to see some evidence. seems like a far more tenuous notion than prices rising, especially given what we have seen in the price of beef, chicken, fish, and wine all of which are up 7%+.

 
At 6/01/2012 10:00 AM, Blogger Jet Beagle said...

morganoivich: "it is common in the industry if you look at full service and midscale restaurants."

No, you are mistaken. I have been responsible for food cost analysis at the world's largest full service restaurant company. It was my responsibility to compare food costs at our full service restaurant chains with those of our peers.

 
At 6/01/2012 10:05 AM, Blogger Jet Beagle said...

morganovich: "regardless, how do you get from 2.5% traffic increases to 13%+ rev increases without big price hikes?"

Those are not numbers which I provided, so I'm not going to explain them. I'm skeptical of a mere 2.5% traffic increase figure. If those are restaurant industry aggregates, there are many ways that the mix of restaurant performances could account for such changes.

 
At 6/01/2012 10:07 AM, Blogger Jet Beagle said...

morganovich,

It is likely that you have a different meaning for the term "full service restaurant" than the one used by the restaurant industry. Red Lobster and Olive Garden are full service restaurants, and their food costs are sure as hell not close to 50% of their sales.

 
At 6/01/2012 10:24 AM, Blogger Jet Beagle said...

Data from the National Restaurant Association:

Food cost as a % of sales

full service restaurants - 32%
limited service restaurants - 32%

Labor cost as a % of sales

full service restaurants - 33%
limited service restaurants - 29%

 
At 6/01/2012 10:25 AM, Blogger Jet Beagle said...

Link to data just provided

 
At 6/01/2012 11:17 AM, Blogger morganovich said...

jet-

"Those are not numbers which I provided, so I'm not going to explain them. I'm skeptical of a mere 2.5% traffic increase figure. If those are restaurant industry aggregates, there are many ways that the mix of restaurant performances could account for such changes."

that's not really a response.

i have given you two sources that use similar numbers for full service restaurants and that seem to line up reasonably well.

mark gave us the sales numbers for the NAR (+13.1% yoy for full service).

if you have some other numbers that you think are better, i'd be very interested to see them, but to just dismiss them and provide no evidence on why is not convincing.

you likely have a point that SF restaurants are not representative as midscale there would be fine dining in 99% of the US.

 
At 6/01/2012 11:20 AM, Blogger morganovich said...

question-

does that food cost includes alcohol, which has also been up a great deal in price?

 
At 6/01/2012 1:16 PM, Blogger Jet Beagle said...

Morganovich,
As I said earlier, you do not seem to be using the industry definition of full service restaurant.

The link you provided shows data for only a small segment of full service restaurants - the ones which take reservations.

The data Mark reported - and the data I provided - includes all restaurants which have waitresses. That's the industry definition of "full service restaurant".

When you mix statistics from two different populations, you can - and likely did - reach an invalid conclusion.

 
At 6/01/2012 1:26 PM, Blogger Jet Beagle said...

Morganovich, if you would simply click on the link I provided, you would see that the 32% figure includes food and beverages.

FYI, there is no 'midscale' with respect to the data Mark provided or the data which I provided. Restaurants are either 'full service' or 'limited service'.

 
At 6/01/2012 1:47 PM, Blogger morganovich said...

jet-

no, the NPD data is comprehensive for all restaurants, not just reservation taking ones.

their "casual dining" data look pretty tight with the opentable data for 2008-11.

this gives me some confidence that the opentable sample set tracks all casual dining/full service pretty closely.

my understanding is that casual dining + midscale pretty much equals full service as the high end is small enough that it does not really move the needle much.

so, again, i have given you 2 independent sources that agree pretty well, one of them based on a full national restaurant survey.

if you have some data that contradicts that, i'd be interested to see it, but i think your criticism that the data is non representative is inaccurate.

 
At 6/01/2012 2:36 PM, Blogger morganovich said...

also:

i concede the point on 32%. you data is convincing.

but you still have not responded to the 13.1% full service issue based on 2.5%ish traffic growth.

contrary to your claim, the NPD data IS extremely comprehensive, the most comprehensive i believe to be available.

the measure ALL restaurants.

their data had all restaurant traffic dead flat for the year ending nov 2011.

https://www.npd.com/wps/portal/npd/us/news/pressreleases/pr_120227

this would seem to imply that using 2.5% traffic growth may be too optimistic, not pessimistic raising even further questions about what is driving nominal gains.

the notion that traffic could be flattish and therefore per capita visits down yet those who were going were ordering more seems unlikely as opposed to the thesis that jumps in prices are keeping demand down.

 
At 6/01/2012 2:47 PM, Blogger PeakTrader said...

Morganovich says: "under estimate inflation, so you over estimate productivity which then gets used as an explanation for low inflation."

Are you saying prices rise only at the consumer level, but not at the producer level?

How do businesses underestimate input costs, i.e. costs of production they actually pay?

When productivity is positive, then output prices are lower, profits are higher, and/or both.

Also, when the velocity of money falls sharply, then the money supply has to rise sharply, just to neutralize the fall in velocity, because MV = PT.

 
At 6/01/2012 3:12 PM, Blogger morganovich said...

peak-

"Are you saying prices rise only at the consumer level, but not at the producer level?"

what?

that is nothing like what i said.

what i said was that productivity is a derived value.

you get it by taking the value of outputs and dividing them by inflation and then comparing them to inputs.

thus, productivity (as the government reports it) is a function of inflation.

if inflation is underreported, this makes productivity look higher.

your question appears to be a non sequitor here.

whether we use cpi or ppi for inflation is irrelevant. they both use the same methodology.

your money velocity example is looking at the wrong causality.

try thinking about it this way:

if the amount of money goes up more than nominal economic activity, then of course the velocity of money drops. the fact that it is dropping is, in fact, because we are printing too much money.

this is not necessarily impactful on inflation.

consider a car lot.

we can ship in 200 cars when we are only selling 50.

the 150 sitting on the lot depress the value of any new one sold even if they themselves are not sold. it's the fact that lots are lying around.

dollars work the same way.

double money supply and even if velocity drops like a rock (and again, i think you overstate just how big a drop there was last year) the value of the dollars drops because there are more of them. that's the same as saying there is inflation.

 
At 6/01/2012 3:38 PM, Blogger PeakTrader said...

Morganovich, productivity represents output per unit of input.

If a worker produces 10 units at the same cost as nine units, then productivity improved.

If input costs rise 3%, then the higher productivity means less than 3% rise in prices, more profits, or both. The output depends on the inputs.

In the equation MV = PT, when V falls in half, then M has to double, just to compensate for the fall in V.

Also, there are other factors, including foreigners absorbing dollars.

 
At 6/01/2012 10:08 PM, Blogger Ron H. said...

"I never see the NYT Economix referenced here in CD but I was curious what folks thought of this:"

And, now you should understand WHY you don't see references to NYT Economix.

What is YOUR opinion of the article, Larry? Let's hear from you.

Is it right, wrong? How? Why?

 
At 6/01/2012 10:18 PM, Blogger Larry G said...

the long and short of it for me?

food for thought.

did you see the 2nd article:

http://economix.blogs.nytimes.com/2012/05/29/republican-keynesians/

 
At 6/01/2012 10:27 PM, Blogger Ron H. said...

Jon M: "Remember that all resources are scarce: there is only a certain number that can go around."

It would seem that Mz. Tyson doesn't believe that. She, along with others that I generally refer to as "Keynesians", (although as you pointed out, that's not quite correct), believe that there is "slack" in the economy, therefore plenty of idle, non-scarce resources.

 
At 6/01/2012 10:44 PM, Blogger PeakTrader said...

When consumer inflation accelerated in the 1970s, labor costs and cost of capital (the two biggest components of input costs) were also accelerating (moreover, oil was a bigger percentage of input costs).

 
At 6/02/2012 2:36 AM, Blogger Ron H. said...

Peak: "In the equation MV = PT, when V falls in half, then M has to double, just to compensate for the fall in V."

Fischer's old quantity theory of money is fairly useless. It basically proclaims that the quantity of money times the number of transactions equals the total quantity of goods and services times the prices. In other words, what is *paid* is equal to what is *received*.

Whoopdy-do. How profound is that?

We can see that despite recent massive increases in M, P has mysteriously moved at a slower rate. There is much not included in that overly simple formula, but of course, it's easier to teach than real world economics.

It was first refuted by B. M. Anderson in 1917, and later elaborated on by Henry Hazlitt.

Would you like links?

 
At 6/02/2012 2:53 AM, Blogger Ron H. said...

"did you see the 2nd article:"

Yes, I did. It's even worse than the first. It must be comforting to apply a label like "republican" or "conservative" to millions of individuals so one can envision their views as monolithic.

It is a mistake to discuss politicians and economics as if there was any connection between the two, or as if politicians actually understood economic principles.

Other than calling republicans inconsistent, something few dispute, It's not clear what Mr. Bartlett's point is.

 
At 6/02/2012 2:55 AM, Blogger PeakTrader said...

Ron, the Fisher equation of exchange is incomplete. However, that doesn't mean it's not useful.

I've written before:

Changes in fiscal policy can change the velocity of money, MV = PT. However, in the long run, V and T are constant. So, M equals P.

If M and P are constant, then V = T, i.e. V, the velocity of money, or the number of times money is exchanged, equals T, the number of transactions, or the quantity of goods exchanged. T can be represented by real GDP.

The goal of monetary policy should be to keep actual GDP close to potential GDP, which smooths-out the business cycle creating optimal growth (since there's neither strain nor slack in the economy).

The fact that there are monetary tightening and easing cycles, to close output gaps, are attempts to smooth-out T in the short-run. V and T fluctuate in the short-run, which require adjustments in M to stabilize P and smooth-out T. For example, if people decide to hoard money, then V and T will fall (in the short-run). So, M needs to rise (higher than a constant growth rate).

 
At 6/02/2012 7:27 AM, Blogger VangelV said...

Ron, the Fisher equation of exchange is incomplete. However, that doesn't mean it's not useful.

I've written before:

Changes in fiscal policy can change the velocity of money, MV = PT. However, in the long run, V and T are constant. So, M equals P.


LOL...Monetary problems are economic problems and have to be dealt with in the same way as all other economic problems. The monetary economist does not have to deal with universal entities like volume of trade meaning total volume of trade or quantity of money meaning all the money current in the whole economic system. Still less can he make use of the nebulous metaphor "velocity of circulation." He has to realize that the demand for money arises from the preferences of individuals within a market society. Because everybody wishes to have a certain amount of cash, sometimes more, sometimes less, there is a demand for money. Money is never simply in the economic system, in the Volkswirtschaft, money is never simply circulating. All the money available is always in the cash holdings of somebody. Every piece of money may one day?sometimes oftener, sometimes more seldom?pass from one man's cash holding to another man's. But at every moment it is owned by somebody and is a part of his cash holdings. The decisions of individuals regarding the magnitude of their cash holdings constitute the ultimate factor in the formation of purchasing power.

Things are not as simple and uniform as you want to assume that they are. We live in the real world, not in an imagined one where things are simplified so that minds that are too lazy don't have to think about reality as it is.

If M and P are constant, then V = T, i.e. V, the velocity of money, or the number of times money is exchanged, equals T, the number of transactions, or the quantity of goods exchanged. T can be represented by real GDP. ...

V is not even an independent variable. It can't be measured. For that matter you can't even measure P and have to make simplifying assumptions even to talk about it. As Mises pointed out, "The exchange-ratio between commodities and money is everywhere the same. But men and their wants are not everywhere the same, and neither are commodities." The world is far more complicated than you admit and your simplified assumption and logic only lead to ignorance of reality.

 
At 6/02/2012 7:39 AM, Blogger VangelV said...

The goal of monetary policy should be to keep actual GDP close to potential GDP, which smooths-out the business cycle creating optimal growth (since there's neither strain nor slack in the economy).

LOL. The world needs no monetary policy from any government. All it needs is a repeal of legal tender laws that create distortions. Let the central banks have competition and they would disappear very quickly.

The fact that there are monetary tightening and easing cycles, to close output gaps, are attempts to smooth-out T in the short-run. V and T fluctuate in the short-run, which require adjustments in M to stabilize P and smooth-out T. For example, if people decide to hoard money, then V and T will fall (in the short-run). So, M needs to rise (higher than a constant growth rate).

I wish that you would stop with the justification for central planning by pretending that V is an independent factor on the money side of the equation because it clearly is not independent. As Hazlitt pointed out, V is driven by individuals' changes in relative valuations of money and goods.

It is clear that as long as the concept of an independent velocity of circulation continues to be used the monetary theory that you advocate will continue to suffer. The problem, of course, is that without that concept your house of cards falls apart and your justification for central planning in the monetary sphere vapourizes.

 
At 6/02/2012 7:39 AM, Blogger VangelV said...

Peak: "In the equation MV = PT, when V falls in half, then M has to double, just to compensate for the fall in V."

Ron: "Fischer's old quantity theory of money is fairly useless. It basically proclaims that the quantity of money times the number of transactions equals the total quantity of goods and services times the prices. In other words, what is *paid* is equal to what is *received*."


Our friend has no clue about how useless the equation happens to be. He does not even know that the terms are not independent variables or are not well defined. As such it is little more than a talking point for lazy people who do not understand economics and like to 'simplify' so that they can try to apply mathematical equations that are not very useful.

 
At 6/02/2012 2:21 PM, Blogger Ron H. said...

"Our friend has no clue about how useless the equation happens to be. He does not even know that the terms are not independent variables or are not well defined. As such it is little more than a talking point for lazy people who do not understand economics and like to 'simplify' so that they can try to apply mathematical equations that are not very useful."

I find it helpful to picture a single transaction. If I buy a good or service, the ownership of both the money and the good or service changes. Money is, at all times, owned by someone, just as are goods and services. To believe there is a "velocity of money" is to believe there is a "velocity of goods and services". In other words V = T.

That being the case, I can remove them from the equation, leaving M = P. How useful is that?

 
At 6/02/2012 3:42 PM, Blogger PeakTrader said...

VangelV says: "We live in the real world."

Constantly criticizing things you know nothing about, or know little enough to be completely wrong, shows you barely have a clue of "the real world."

There's nothing in MV = PT that explains the changes in those variables. You need to see other equations.

You may want to look at economic models firms actually use, to see why those equations are actually useful.

 
At 6/02/2012 4:54 PM, Blogger Ron H. said...

Peak: "There's nothing in MV = PT that explains the changes in those variables. You need to see other equations.

You may want to look at economic models firms actually use, to see why those equations are actually useful.
"

I don't believe anyone argued that there are NO useful economic models, only that MV=PT, something YOU brought up, has no practical meaning. Are you now backing away from your previous position by suggesting that we look at other models?

 
At 6/02/2012 7:24 PM, Blogger Jet Beagle said...

morganovich: "i concede the point on 32%. you data is convincing.

but you still have not responded to the 13.1% full service issue based on 2.5%ish traffic growth."


I have not responded because I don't care. You asked how could a 7 to 10 percent rise in food costs not flow through to restaurant prices. I explained that food costs are only about a third of overall costs. That's when our argument started.

The problem with trying to correlate traffic and revenue is that these are aggregates. If traffic at lower priced restaurants declined more than traffic at higher priced restaurants - even just a small amount - then aggregate restaurant revenue could decline less than traffic or even increase.

If enough restaurants increased their sales of more expensive items relative to cheaper items, revenue could also move in an opposite direction from traffic. That would not mean inflation of restaurant prices, but could simply mean changes in preferences by consumers.

The truth is, morganovich, I don't know and I don't care. You asked how something could happen - how beef and seafood cost increases could not flow through to restaurant prices - and I explained it to you.

 
At 6/02/2012 8:30 PM, Blogger PeakTrader said...

Ron, I give you an example how MV = PT is useful and you say M = P, which is not working (unless you're Morganovich or VangelV).

 
At 6/03/2012 1:53 PM, Blogger Ron H. said...

Peak,

"Ron, I give you an example how MV = PT is useful and you say M = P, which is not working (unless you're Morganovich or VangelV)."

I'm struggling to understand this comment, but if you're comparing my understanding of this topic to that of morganovich and VangleV, I'm flattered.

It's not clear in the above, whether you are saying M=P, or M / =P in the little formula, but I don't see how V can have any life of it's own, independent of T.

My point isn't that math breaks down at this point, but that the only useful conclusion one can draw is that M equals P, which while true in the long run, isn't very useful in the short run. You made that claim yourself on this thread.

Increasing M - something we've seen a lot of recently - will ultimately lead to increased P, but doesn't necessarily lead to increased T, which was the justification for the increase in M.

 
At 6/03/2012 6:12 PM, Blogger PeakTrader said...

Ron says: "If you're comparing my understanding of this topic to that of morganovich and VangleV, I'm flattered."

Don't worry. I have complete confidence Morganovich and VangelV are no better than you.

 
At 6/03/2012 8:29 PM, Blogger Ron H. said...

Peak: "Don't worry. I have complete confidence Morganovich and VangelV are no better than you."

Well that's fine, but do you concede that the "velocity of money" has no useful independent meaning?

 
At 6/04/2012 1:48 AM, Blogger PeakTrader said...

Money doesn't circulate at a constant rate, for whatever reason.

I stated above, in the equation MV = PT, when V falls, then M has to rise to compensate.

I also stated above there are other factors that influence the variables.

 
At 6/04/2012 12:54 PM, Blogger VangelV said...

I stated above, in the equation MV = PT, when V falls, then M has to rise to compensate.

In what kind of 'useful' equation do you have variables that are not independent and values that cannot be determined? How exactly do you determine the value of V independently? How do you calculate the value of P or T? And if you can't answer those questions adequately how can you claim the equation to be useful?

 
At 6/04/2012 1:29 PM, Blogger Ron H. said...

"Money doesn't circulate at a constant rate, for whatever reason."

Money doesn't "circulate" at all. It changes hands in exchanges.

"I also stated above there are other factors that influence the variables."

M is a variable. P is a variable. T is a variable.

V has no meaning unless it represents one side of the total of transactions known as T.

Money represents goods and services in exchanges, so to use the term "velocity of money" is as silly as saying the "velocity of groceries" or "velocity of labor" or "velocity of corn" to represent the volume of exchanges in those items.

There is no "circulation" of money independent of exchanges, so V, by itself, has no meaning.

"I stated above, in the equation MV = PT, when V falls, then M has to rise to compensate."

V falls when T falls. M doesn't magically rise to keep P and T constant.

To think that a small group of really smart people can manipulate M in an attempt to regulate P and T is pure hubris, but increasing M can, and usually does, lead to increases in P.

"I also stated above there are other factors that influence the variables."

THAT I agree with, in fact that's quite an understatement.

 
At 6/04/2012 4:29 PM, Blogger PeakTrader said...

Ron, I stated above: "The velocity of money, or the number of times money is exchanged, equals T, the number of transactions, or the quantity of goods exchanged."

In the equation MV = PT, the appropriate choice when V falls is to raise M, which typically raises PT. So, V is raised and the appropriate choice is then to reduce M.

 
At 6/04/2012 4:31 PM, Blogger PeakTrader said...

A fall in V can represent a credit freeze, economic shock, people hoarding money, etc..

 
At 6/04/2012 4:35 PM, Blogger VangelV said...

In the equation MV = PT, the appropriate choice when V falls is to raise M, which typically raises PT. So, V is raised and the appropriate choice is then to reduce M.

But you are missing the point. V is not an independent variable that you can measure. It is actually dependent on the other variables in your equation. Try thinking about what that means about the usefulness of the equation.

 
At 6/04/2012 5:26 PM, Blogger Ron H. said...

Peak: "Ron, I stated above: "The velocity of money, or the number of times money is exchanged, equals T, the number of transactions, or the quantity of goods exchanged."

Exactly! We agree: V=T. Therefore you could remove them from the equation, as they only reflect the *size* of M and P, not the relationship between them. You could as easily write (3+3)M=6P, since (3+3)=6.

You could also write M=P, MV=PV, MT=PT, or MT=PV. those are all the same equation, given V=T.

That being true, what value do you see in any of those expressions of M=P?

You seem to believe that using two different labels, V and T, to describe the same thing gives additional meaning to M=P.

"In the equation MV = PT, the appropriate choice when V falls is to raise M, which typically raises PT. So, V is raised and the appropriate choice is then to reduce M."

You could also write that when T falls, the appropriate choice is to raise P, which typically raises MV.

"A fall in V can represent a credit freeze, economic shock, people hoarding money, etc."

Yes a fall in T can be *caused by* those things. An increase in M should then increase P, to keep PT at the same level - as if there's some value in higher nominal prices.

 
At 6/04/2012 5:39 PM, Blogger PeakTrader said...

VangelV, I never stated V is a dependent or independent variable.

Basically, I've stated when V falls and M is unchanged, from an output gap, then M needs to rise.

 
At 6/04/2012 6:09 PM, Blogger Ron H. said...

Peak:

"VangelV, I never stated V is a dependent or independent variable.

Basically, I've stated when V falls and M is unchanged, from an output gap, then M needs to rise.
"

Perhaps this is a word problem. If V=T, which I believe is now a given, and T is variable, also a given, then V must be a variable also, no?

When you write of V falling, is that not a variable? But yet, V cannot change independently and affect the relationship between M and PT.

If you wish to say that increasing M is a trick to fool people into thinking they are richer than they really are, and that they will rush out to buy things as a result, fine. Just say so.

Please also remind us that by the time most people have more M in their hands, that P is up, whether or not there's any change in T.

 

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