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September 15, 2000
Mortgage rates were unchanged this week. Again. Four weeks in a row, now.
Robert McTeer, Dallas Federal Reserve Bank president: "Once we get over the energy bump, I wouldn't be surprised if inflation declines and interest rates come down."
McTeer is an inflation and interest rate "dove", and one of the high-productivity, New-Economy true believers. However, his statement this week got support from new data.
The consumer price index fell last month for the first time in 14 years, down one-tenth percent, joined by producer prices, down two-tenths. Some of the decline is illusory, reflecting a decline in gasoline prices after the spring-summer bulge -- a decline soon to be reversed by the new effects of $35/bbl oil. However, the core rates of inflation excluding food and energy prices were comfortably low and steady, CPI up only .1%, producer prices up .2%.
Retail sales in July flattened to a meager .2% increase, and overall business sales fell .4%. In a reaction to falling demand from consumers, industrial production slid to a negligible point-one percent gain.
This data pattern suggests more slowing ahead, and a much lower likelihood of a rebound to superheated economic growth. New Economy or not, all the large-scale influences are tugging the economy downward.
The Fed funds rate at 6.5% is the highest since 1991. In the interval, the Fed's only hike as high as 6.00% (February 1995) had to be reversed in five months.
These high prices for energy are equivalent to a tax, an outright extraction of disposable income. The money is ultimately recycled, but with a long time lag: capital spending on new exploration, and increased consumption of imported goods by OPEC. Next up: a shortage of natural gas, created in part by utilities substituting gas for expensive oil. New England Yankees will not suffer alone: Midwestern heating bills may rise 40% or more.
Then there's the wealth effect. Remember? Back in February, when Ol' Alan got in such hot water for insisting that stock prices had to stay put?
The S&P 500 year-to-date performance: plus 1.07%. The Dow: minus 2.74%. The Dow Jones U.S. Total Market: plus 2.25%. The New Economy NASDAQ: minus 4.31%. This absence-of-wealth effect isn't pushing the economy anywhere.
You know that budget surplus Albore and Dubya are arguing over?
A "diminished wealth effect" (Mr. Greenspan's phrase in July) will diminish tax revenue from capital gains, stock option sales, and overall economic activity -- and diminish the surplus.
Unfortunately, not the argument.
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