We Keep On Muddling Along
The economic news continues to be mixed. Not bad, but the good always comes with a twist.
Industrial Production:
Take today’s report that industrial production dropped 0.1% last month. The view on the “street” was that it would grow 0.7%. Even if we discount the analyst’s views, as we should given their optimistic bias and rotten track record, to miss the mark by such a margin requires an explanation.
This is especially true when we also read that the Philadelphia Fed’s index of manufacturing activity has reached 43.4, its highest reading since 1984. The Philly Fed’s upbeat report is backed up by the Institute of Supply Management index that has national manufacturing activity at it highest since 2004.
Taking all this together we are driven to odd conclusions. Either Philly is booming and the rest of the country is in dire straits, or, more likely, the data is being muddled up by something. That something being utility activity which is included as manufacturing, but which marches to a different rhythm. Weather matters. The past month has seen some warmer weather and that has cut utility demand. That cut translates into enough of a drop in power plant production that the overall manufacturing numbers decline rather than increase. If we focus simply on factory output we see that it rose 0.4% in February, the seventh straight month of increase and is now up about 7.0% over the past twelve months. The details within this report reveal that the strength is spread across most industries, which a good sign of overall economic health, with hi-tech and automobiles leading the way. Production of cars is up 14.3% over that last year; and hi-tech activity has risen 16.8%.
Inflation:
The news on inflation is much more mixed, and a little concerning in the short term.
It comes as no surprise to read that the headline inflation index rose sharply last month, by 0.5%. This obviously reflects what we all know: food and fuel prices have risen quickly as various crises and supply issues have disrupted markets. Besides those temporary problems, the underlying shift has been towards prices rising in the face of demand driven by the economic recovery well underway world wide. The trick for policy makers is to tease apart the more problematic longer term trend from the fluctuations caused by these short term disruptions. That’s why they tend to use the so-called core inflation rate rather than the headline number. At this core level, inflation is still relatively low: it rose 0.2% last month. This is well within acceptable bounds and is unlikely to prompt an anti-inflationary interest rate increase any time soon.
Naturally none of this will prevent the austerity hawks from jumping up and down and warning of an impending inflation disaster. They are driven by ideology and not facts, so they will see such a disaster under every possible rock. The confrontation between the Fed’s longer term perspective and the austerity hawk’s opportunistic view leads to some awkward moments. One such was last week when Bernanke tried to explain he was not worried by the jump in food and fuel prices – at least not yet – because they appear to be temporary. He and other Fed officials then pointed to the introduction of the iPad2 and its price as an example of the way in which innovation holds the price of goods down and thus mitigates inflation. The Fed has a valid technical point: we should evaluate prices in the context of the service rendered at that price. If we pay the same for new products that outperform the old ones, then the real price has gone down – we are getting more bang for the same buck. Unfortunately this argument gets clouded quickly in the minds of both austerity driven politicians and the media, leading to headlines that read: “The Fed Says Let Them Eat iPads”. This is what we read in the more sensational press the following day, and is not exactly what poor old Bernanke was saying. It can be difficult sometimes to maintain coherence in the face of determined ideological opposition.
Overall consumer prices have risen about 2.1% over the last twelve months, which is a clear acceleration from the annual rate we were reporting back in November and December.
So the pace is picking up. But by not as much as food and fuel prices would indicate.
Wages:
One normal source of inflationary pressure during a recovery is wage increases. Not this time. Real average hourly earnings dropped 0.5% last month because wages stayed flat and inflation rose. Those flat nominal numbers thus were not a source of inflationary pressure. Over the last year wages adjusted for inflation have fallen 0.4% – since the CPI has risen 2.1% this implies nominal wages have risen only 1.7%. This includes the impact of overtime and longer work weeks as employers ramp up output. Clearly workers are not benefitting from the recovery as much as they used to. The huge unemployment overhang has much to to do with that. Employers have no incentive to raise wages when workers are abundant and relatively cheap. Having said that there is no real evidence of employers increasing their workforces anyway. Which all means that most of the wealth generated from the recovery so far is going to profit and corporate cash flows, and not into household pockets.
Unemployment:
The last piece of news to report today is the weekly data for new claims for unemployment assistance. They fell by 16,000 to 385,000, which brings the four week moving average down to 386,250.
Claims numbers have been very volatile recently and so difficult to read for their significance. I think we can say two things: (1) they are moving in the right direction; and (2) they are moving too slowly. There is still no hard evidence of a strong recovery in the jobs outlook. We appear to be stuck in no man’s land. People who survived the crisis, and did not lose their job, are now feeling the threat of dismissal ebb. This gives them cause to spend and start planning a more normal consumption pattern. But those who lost their jobs are facing a very different outlook. There is no spate of new jobs for them to apply for; their savings and other forms of support are dwindling – if not already exhausted; and their skills are steadily eroding. In other words the economy has split into two very different communities. The one struggling to get back to normal, the other struggling simply to survive.
This separation has bred a feeling of complacency in politics where the emphasis is no longer on recovery, but on shaping the economy beyond the recovery. Hence the sudden shift towards discussions about debt and deficit reduction even while millions of our fellow citizens wallow in misery. Since things are no longer getting worse, the assumption has become it is time to look into the medium or longer term future. This is completely wrong. We are not yet out of the woods. At the current rate of growth it will take years to absorb the unemployed workers back into the workforce. But the more likely outcome is that many of them will simply abandon any attempt to find work and will just drop out of the workforce. This has the effect of reducing the economy’s capacity to grow and thus limits our overall wealth accumulation prospect.
This should be a reason to continue our efforts to expand the recovery by pumping up demand to create jobs. Apparently not. The ideologues are winning, and we are abandoning the unemployed to fend for themselves. Ultimately we all lose as the economy’s potential growth path is shifted down. Since that seems hard to explain not many people are bothering any more.
So: the upshot of today’s news is that we are still muddling along.
The economy is growing at a decent, but not great, rate. The fact that wages are not getting their share of the growth suggests that the shape of the recovery will be biased in the same way as the last one. Profits will do well. That means stock prices will rise. Jobs will be scarce and not well paid. And the squeeze on the lower echelons of society will tighten.
And this with a Democratic president. It shouldn’t be this way.
