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Not all economic signs are pointing to recovery
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The crummy employment market isn’t the only thing casting
doubt on President Bush’s perception that “the economy
is growing” and is “going to get stronger.”
The low-inflation alarm is still blaring, too, although most have
stopped listening.
Core inflation — the rise in consumer prices minus those for
energy and food — was just 1.1 percent in January compared with
the same month in 2003, according to a report Friday.
Along with equally tiny bumps in December and November, that was
the smallest year-over-year increase in the core rate, to put it in
technical terms, “since the Beatles were on the Ed Sullivan
show,” says Standard & Poor’s economist David
Wyss.
Inflation emits important information about supply, demand and the
money pool. And it’s still broadcasting the message we
started hearing shortly after Sept. 11, 2001: America, you have way
too many workers and factories and — still! — not enough
consumption of goods and services.
Economists had hoped higher inflation would signal growing demand
for products and a dwindling supply of idle workers and business
assets — the foundation of a sustained recovery.
It hasn’t happened. There has been an almost relentless drop
in the core inflation rate during the past two years.
“None of the fundamental problems have gone away,” says
Lacy H. Hunt, a former Federal Reserve economist now with
Hoisington Investment Management in Austin, Texas.
“We’re choking on debt. There’s no pent-up demand
for cars and houses. We’ve got excess capacity in
manufacturing. We’ve got excess capacity in the labor
markets.”
True, some analysts see inflation stirring in the overall consumer
price index.
Friday’s report showed general prices jumping at an
impressive annual rate of 6 percent. But that was driven mostly by
energy costs and says more about what’s going on in China and
Saudi Arabia than the U.S. economy. It won’t persist, which
is why many economists prefer to screen out volatile food and
energy prices and eye the fundamental core rate.
It’s also true that commodity prices have soared, which some
believe could bleed into retail costs. The Commodity Research
Bureau’s spot-price index has popped by 18 percent since last
summer. Gold is up 20 percent since early last year. We know about
oil.
But as the American Enterprise Institute’s John H. Makin
points out, higher U.S. commodity prices can be explained mostly by
a weaker dollar. Measured in euros, he says, commodity prices have
been stable.
And commodities are a little part of the economy, anyway — only
one-tenth of the cost of production, Hunt says.
Nobody at the Federal Reserve has worried much lately about
deflation — falling prices — at least not out loud. But
Friday’s report underscores the fact that the meager rate of
increase in consumer prices is still very close to the Fed’s
panic level.
Fed Governor Ben S. Bernanke, the central bank’s chief
deflation worrywart, has said he’s uncomfortable with core
inflation below 1 percent. He’s perilously close with the
results issued Friday, and by another measure core consumer
inflation was under 1 percent in the fourth quarter.
The closer inflation gets to zero, the higher the likelihood that
prices will start to fall, depressing profits and buying power,
boosting the relative size of debts and killing consumption as
shoppers realize they can get bargains by waiting.
Deflation, one of the most poisonous aspects of the Great
Depression in the 1930s, was basically caused by a shrinking money
supply as too few dollars chased too many goods.
Guess what? Despite Alan Greenspan’s heroics, two key
measures of the U.S. money supply contracted in the fourth quarter
at the fastest rate since measurement started in 1959, Hunt
says.
Depression-style deflation is probably impossible now because we
are no longer linked to an inflexible gold monetary standard. Even
so, weak inflation is telling us some disturbing things.
It’s saying workers are in such great supply, thanks to
unemployment, that companies can hire them for a song. It’s
saying plants and inventories are so numerous that retailers
needn’t get into bidding wars to stock their shelves.
It’s saying the economy has a way to go before it enters a
full recovery.
Hancock is a financial columnist for The Baltimore
Sun
Jay Hancock
The Baltimore Sun
