Can the Deflation Equation Produce Good News for the U.S. Economy?
In its December Economic News Release, the Bureau of Labor Statistics seems to confirm that the U.S. economy has clearly entered a deflationary period. To be accurate, the BLS does not actually make judgments like that for public consumption. “Deflation” is Mr. ToughMoneyLove’s hard truth assessment of this recent data. (What would you call it?)
Here is a chart of the most telling data – the monthly percentage changes in the urban consumer price index over the past year:
Check out the CPI ski slope nosedive for November. I think (and many economists agree) that the downward trend will continue into 2009. Unfortunately, other opposing evil forces are at work. OPEC – perhaps joined now by Russia – is striving mightily to cut production in a desperate attempt to force oil prices back into the unconscionably high zones of earlier in 2008. (Let’s all hope for a colossal OPEC failure on this one. Wouldn’t it amusing to see a 2009 yard sale of limos, jets, and boats by all of those oil sheiks?)
The knee-jerk reaction to this news of deflation is woe is us, it’s a sure sign of a deepening recession or worse. Not so fast, says Mr. ToughMoneyLove. Let’s logicize our way through this. (Do you like my new verb “logicize”? I was inspired by the same Presidential dictionary that brought us “strategery.”)
Before everything hit the fan earlier this year, consumers were relying on credit to spend because the combined costs of the things they were buying exceeded their personal incomes. But the triple-whammy combination of falling consumer prices, monetary policy actions, and fiscal stimulus actions described above may change that significantly. The flow of business credit induced by Fed actions should enable businesses to make stuff that consumers want to buy. Consumers will have more purchasing power (due to deflation) to buy that stuff. And, consumers may not have to borrow (or borrow as much) to exploit that spending power because the stimulus actions will prop up incomes and put more money into consumers’ pockets. That, my friends, is a recipe for re-starting our economy without a return to the consumer credit abuses of recent years.
The “x-factor” in this positive-outcome deflation equation appears to be unemployment. If the unemployment curve flattens over the next few months, then things can play out as I have described. On the other hand, if unemployment continues to spike, there may not be enough consumers with paychecks to take advantage of the lower consumer prices. In that case, the “woe is me” contingent will have prevailed. Economic activity will continue to decline and ….. well who knows what happens next.
Even if deflation now produces good news later, we will not necessarily be out of the woods on the inflation side. I think the price for huge government deficits remains to be paid. But let’s first turn this economy around so that more people can get back to work.
So that’s my amateur economic analysis of this recent data. What’s yours?