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June 26, 1992
Durable Goods orders declined 2.4% in May, surprising because manufacturing has been the strongest sector of the recovery. Given the low level of interest rates, the 1.7% drop in Existing Home Sales in May was also a surprise.
In a normal, short, Fourth of July week, there is not a decision maker to be found in the credit markets. Traders and executives move in a Mercedes mob to the beach.
Next week, there may be some sand flying around as 98pound traders scramble for their cellular telephones.
Thursday, July 2 brings the release of June employment statistics. This report gets a lot of attention each month, but its importance is magnified, now.
Jobs or the absence thereof is the key element keeping inflation under control and keeping interest rates down. Given a fantastic federal deficit, and the 2% or so economic growth underway, inflation should be nearby.
Instead, inflation is declining. The force behind the decline is little or no job growth: nonfarm payrolls have had a tough time growing by as many as 100,000 in any month this year. Meanwhile, 400,000 people have filed for unemployment insurance each week.
That number is not as bad as it sounds, as most new jobless are rehired soon. But the new job market is so weak that we may well return to January interest rate lows.
A tight job market means that people have to compete for scarce jobs, and accept lower pay. Not just "flipping burgers" all wage earners suffer.
The Fed has no direct control over the labor market, though its refusal to run the printing presses on two shifts is a contributing factor. Given the choice, strongstomached central bankers everywhere will chose unemployment over inflation. (Though they won't even let their spouses know that that's the choice they are making.)
Normal aspects of the business cycle are more at fault than the bankers. Mergers and a general downsizing of corporate America have had a big impact. A gross, twentyyear shortage of investment is another cause. Ditto poor education and worker skills. Also, this time, Congress doesn't have the money for "jobs programs."
Social engineers have a hard time with the jobswages inflation equation. Very disturbing to your average full employment utopian is this inevitability: inflation is defined by wages increasing faster than productivity.
So, as leftleaning teeth gnash, arch capitalists idly sun themselves, waiting for joyous word of new layoffs.
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