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August 5, 1994
A mild surprise in job growth has contributed to an overnight, quarter-percent rise in mortgage rates. The abrupt reversal of a week-long decline in rates is more due to the Treasury's $40 billion borrowing next week than the 259,000 gain in July Non-Farm Payrolls.
Other data supported the notion that the economy is in a consolidation phase. The July Purchasing Managers' index held its ground, up to 57.8% from 57.5%, and June Leading Indicators rose a marginal .2%, while weak reports had New Home Sales dropping 14%, and Auto Sales down again.
The weakness in car sales has added heat to the debate about the presence or absence of "inflation pressure," and right now, the guessing contest centers on merchandise, not jobs and wages.
There is no formula for predicting inflation. Oh, there are some things you can do to guarantee it (print several trillion dollars in crisp, new C-notes, and drop them from airplanes, for one), but no surefire way to see it coming.
Of the maybefire leading indicators, the two best are jobs and merchandise. Merchandise comes into play when demand appears to exceed supply and production capacity (the oldest definition of inflation: too much money chasing too few goods). Last week's gross domestic product report created hope that production bottlenecks were a long way off, as merchandise inventories seemed plentiful.
This week, the revisionists are loose. The inventory buildup was on purpose, they say. No sign of weakness at all, but anticipation of red hot future demand. And, in that worst of inflation harbingers, this inventory buildup is supposed to be a sign of hoarding: the advance purchase of goods to avoid future price increases.
Inflation doesn't arrive all at once, it creeps, one industry at a time. Enter the car creeps, and a test of the bottleneck theory. In the last four months the annual rate of car sales has fallen by two million units. While there is no sign of a spreading increase in car prices, inflation hawks this week maintain that sales have fallen because manufacturers can't make cars fast enough. The economy is too hot, and demand is still high, just no cars to sell.
This argument is a little hard to take. Voices at GM: "Well, Fred, we're down to our last Saturn." "Yeah, remember the good old days when we could raise prices?" "Better not do that now. Why, if we tried, all those people out there waiting in line to buy this baby would just go away." "Yup. An extra five hundred bucks, and it might take us years to unload it."
There are stories about production bottlenecks everywhere from dipsticks to disk drives, but no price increases. It is dangerous to join politicians, and insist that the Fed wait until it sees the white of inflated eyes, but "inflation pressure" is fantasy if prices stay put.
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