DUE DILIGENCE - Is stagflation in the cards for U.S.? Bad economic data point to slow growth, higher prices
cbs.marketwatch.com Rex Nutting, CBS.MarketWatch.com Last Update: 3:14 PM ET Feb. 20, 2003
WASHINGTON (CBS.MW) -- Higher prices, slower growth, more layoffs ... a couple more months like this and people will start waxing nostalgic about the days of Jerry Ford and Jimmy Carter.
Have we added inflation to our list of worries about the anemic economy? Is stagflation -- that uniquely dismal marriage of high inflation and stagnant growth -- in our future?
On the surface, the economic data released on Thursday aren't comforting.
"This is the worst economic news day since the 9/11 period," said Ken Mayland, president of ClearView Economics.
Exhibit A: The nation's producer price index jumped 1.6 percent, the most in 13 years, as energy prices rose 4.8 percent on jitters about supplies from the Middle East.
Exhibit B: America's trade deficit surged to a record $435 billion in 2002 with no relief in sight. If the U.S. economy is lame, the rest of the world is crippled. There's no market for U.S. goods. See full story.
Exhibit C: Growth in the manufacturing sector has ground to a halt in the Philadelphia region. Worries about the war are adding to the weak climate for spending and hiring. See full story.
Exhibit D: The labor market is treading water. With new jobless claims totaling 370,000 to 400,000 each week, there's not enough job growth.
The data don't look encouraging. But, on the bright side, things could be worse. A few months ago, the big topics were deflation and double-dip recession. And it was repeat of Herbert Hoover, not Jimmy Carter, that we feared most.
So stagflation is a step up from where we were. But is it really worth worrying about?
The stagnation part is a given, at least for now. Although the recession is over, there's still little growth.
"The U.S. economy could advance soon," Ken Goldstein, a Conference Board economist, said with hope but without much conviction.
Low confidence
Neither consumers nor businesses are confident in the future. Both are burdened with debts and both are putting new cash flow to work repairing balance sheets. Both sectors are waiting. Waiting for the war, but even more waiting for things to get better.
"The fundamental labor market picture does not appear to be changing much, and probably won't -- at least for the better -- until after the war," said Steve Stanley, economist at RSB Greenwich Capital.
Only about a quarter of firms surveyed by the Philadelphia Fed plan to increase hiring or spending in the next six months. About 40 percent of the firms said geopolitical concerns have crimped their capital spending or hiring plans, so you might expect that things would improve once the war is over, or once it's finally begun. Read more.
However, about half of the firms who say the war is holding them back don't have any plans to expand in the first six months after the war.
Clearly, weak demand won't disappear with Saddam Hussein.
The inflation part of the equation is a little trickier.
There are intense deflationary forces at work in the global economy, particularly the competition from low-wage manufacturers like the Chinese.
But at the same time, there are also inflationary pressures stemming from the same war fears that have frozen the American economy in suspended animation.
The global energy system is being squeezed by perfect combination of events. The cold winter in North America pushed up demand just when supply was truly restrained by the general strike in Venezuela.
Add in the uncertainty over Iraqi, Kuwaiti, and possibly other Gulf producers, and you have the recipe for $40 a barrel oil.
At this rate, there may be no cushion left in the system. Any disruption could push energy prices to record-high levels, even when adjusted for inflation. See full story.
Rising oil price
Much of the increase in the January producer price index stemmed from higher oil prices. Gasoline prices rose 13.7 percent and heating oil prices appreciated by 19.7 percent. Tight supplies and rising demand will do that. Read the full release.
But other prices rose in January as well.
Food prices rose 1.6 percent, including big increases in vegetables, meat, fish and even baked goods. The increase in food prices could just be noise in the data. After all, wholesale food prices are up just 0.4 percent in the past 12 months, so there's no trend toward runaway prices.
A 3.5 percent surge in car prices also contributed to the outsized 0.9 percent gain in the core PPI, which excludes food and energy prices. But once again, the January number could be an anomaly: The trend is toward lower car prices, as everyone knows. Wholesale car prices are down 1.4 percent in the past 12 months.
The jump in inflation in January cannot be dismissed by excluding everything that rose. On the other hand, there's little reason to believe that suddenly everything has changed and that businesses all throughout the economy now have the so-called pricing power they crave.
Inflation will hurt the U.S. economy this year. The rise in energy prices has already cut about $50 a month out of household budgets. The business sector is also facing those higher costs and attempts to pass those costs along may not be any more successful than the airlines' failure to impose a fuel surcharge.
Are we in for a repeat of the 1970s? One encouraging sign is that energy matters much less to the economy now than it did then. Each of us uses as much energy now as we did in 1973, but we produce 75 percent more. Rex Nutting is Washington bureau chief of CBS.MarketWatch.com.
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