Wednesday, April 20, 2005

This is the boom

Right now is the boom of this cycle.

Depressing isn't it. Job growth is keeping even (at best) with population growth. Hourly wages are stuck in an extremely narrow band where the only movement is random statistical noise. Total cash compensation for non-supervisory employees is falling in real terms. And this is the boom.

At least that is what the inflation indicators are telling us. The freshly released CPI numbers for March show a gain of .6% which is an acceleration from February and January. Just looking at the core rate (ex. energy and food), inflation went up .4% last month. As the AP notes:
consumer inflation rising at an annual rate of 4.3 percent in the first three months of this year. That was a full percentage point above the 3.3 percent rise in prices for all of 2004. [ed note: core rate annualizes as 3.3% v 2004 core rate of 2.2%]

This inflation on the consumer side is not the result of systemically stronger pricing powers by companies which would lead to increased profits. Instead, producer prices are increasing as commodities (oil, steel etc.) are increasing in price.
Kash at Angry Bear has made some selective clipping from the report:

The Producer Price Index for Finished Goods advanced 0.7 percent in March, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This increase followed a 0.4-percent rise in February and a 0.3-percent gain in January. As they did in February, prices for finished goods other than foods and energy edged up 0.1 percent in March. At the earlier stages of processing, the intermediate goods index rose 1.0 percent, after climbing 0.7 percent in the prior month, and prices for crude goods turned up 4.3 percent in March, after declining 1.6 percent a month earlier.

These are the typical characteristics of a boom as high demand stresses the economy through increaesd inflation and shortages. The natural counteraction is for interest rates to rise so as to act as a rationing mechanism of capital. Mark Thoma notes the St. Louis Fed. Reserve Governor William Poole (who I thought was a cornerback for the Dolphins) has recently stated that interest rate movements will not be orderly and instead data driven. The betting markets (via David Altig's MacroBlog are guessing that rates will be plateauing at below neutral levels for a chunk of the summer.

Barry at the Big Picture is looking at the economy today as the end of a great hangover when we forgot to drink our water last night and take some B-vitamins. He is making a recession call.

The post-crash era saw massive government stimulus: Personal income taxes were cut, deficit spending soared, interest rates were dropped to half century lows, money supply increased dramatically, two wars were prosecuted, corporate dividend taxes were slashed, capital gains taxes were cut, capital expenditures were granted a special accelerated depreciation. Massive stimulus from the government included “everything but the kitchen sink.”

Now, that stimulus is fading. The most vibrant sector of the economy – the real estate complex – is slowing. Increased energy costs are a drag on the global economy. Interest Rates and taxes have been going higher. Earnings momentum, as measured on a year-over-year basis, has been slowing for 5 quarters. Hiring remains anemic, CapEx is unimpressive, LEI are softening, GDP is fading.

The market has begun recognizing that the first post-bubble expansion was premature. It has failed to develop organic momentum of its own. Without further stimulus, this cycle will more likely than not end over the next 2 or 3 quarters.

So this could be the boom of the cycle.



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