Monday, September 22, 2014
Inquirer Daily News

Gathering gloom?

Economics in a nutshell: The slowdown in inflation is good news but the growing number of gloomy economic numbers is beginning to catch my attention.

Gathering gloom?

The Federal Reserve Bank of Philadelphia. (Joseph Kaczmarek / Associated Press)
The Federal Reserve Bank of Philadelphia. (Joseph Kaczmarek / Associated Press)

INDICATOR: April Consumer Price Index/Philadelphia Fed Survey

KEY DATA: CPI: -0.4%; Non-Food and Energy: +0.1%/Philadelphia Fed: down 6.5 points

IN A NUTSHELL: "The slowdown in inflation is good news but the growing number of gloomy economic numbers is beginning to catch my attention."

WHAT IT MEANS: The April reading on consumer prices came in as expected: it was down. This was the third inflation report this week and after we saw declining import and wholesale prices, it was logical to assume that the Consumer Price Index would post a decline. And, as expected, energy led the way. The details, though, were fascinating. You know all that excess supply of natural gas, well it is not doing much as utility supplied gas posted its third consecutive large rise. I guess there is a new economics in gas, if you want to sell more, raise the price. The energy companies are trying to emulate schools, where prices and demand continue to rise. Actually, there has been a cut back in production in order to get prices up and it seems to be working. I will not comment on what that says about the market. We are also continuing to get good news on the medical care front as costs are largely going nowhere. That helps everyone and explains some of the large decline in the expected budget deficit that was released this week. Food costs were tame (but not bakery products) and clothing prices fell so it is safe to go to the mall and the supermarket. The one place, other than education, where prices seem to be rising is for vehicles. Solid sales have provided the vehicle makers with some pricing power.

The Philadelphia Fed's May survey of local manufacturing dropped sharply, mirroring the New York Fed's report. Orders were down and that led to thinning backlogs and payroll cut backs. The weakness in the regional Fed surveys is a warning that the Institute For Supply Management's next report could be disappointing. We could see it turn negative for the first time since last November, when we were in the midst of an election and a fiscal cliff debate.

MARKETS AND FED POLICY IMPLICATIONS: Inflation is not an issue for the FOMC, despite what some on and off the Fed may believe. Yes, there are concerns that down the road the economy could become so strong that inflation rears its ugly head again. But Washington will likely do all it can to slow growth further so I am not that worried right now. Indeed, tax increases and sequestration have combined to keep the economy from reaching its potential this year and there appear to be few signs that our elected officials have learned any lessons. They seem intent on proving Einstein right ("Insanity is doing the same thing over and over and expecting different results.") So with inflation showing no signs of being a problem, the FOMC can continue to buy at the current pace for a long time. And if inflation gets a little to hot because growth booms, well I suspect the monetary authorities will not be too upset. It is a lot easier to slow robust growth than create robust growth, as we have seen over the past four years.

About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel at joel@naroffeconomics.com .

Joel Naroff
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