Inflation causes seen as fleeting
In case you hadn’t noticed, the economy wasn’t stellar in the first quarter. Gross domestic product grew a modest 1.8 percent, or about half the pace of the previous quarter. The good news is that GDP was in line with economic forecasts. Well, good news for economists who got something right.
According to these same economists, there’s also good news for the rest of us. The slowdown is transitory. Moving forward, factors such as bad weather, which hampered construction, and a sharp drop in defense spending will likely reverse. Other transitory issues, including high gas and food prices, stifled consumer spending, which only rose 2.7 percent in Q1 versus 4.0 percent in Q4.
Transitory is the economic world’s new favorite word, as it is Fed Chair Ben Bernanke’s, who continually invokes it when discussing the spike in inflation indicators.
So there’s no reason to worry about the slower growth rate. According to TD Securities economist Millan Mulraine, what we experienced was merely an economic “shudder.” That’s right, a shudder. Didn’t you feel a slight non-weather related chill last winter? Maybe you didn’t notice because of the awful weather. Ironic isn’t it? A weather-related chill caused a non-weather related chill.
According to White House economist Austan Goolsbee, the GDP report showed that the measures put in place by the administration have helped foster growth. Wow, he must have gone to the Donald Trump School of Reality. If nothing else, the administration is consistent. They used a similar argument to defend the stimulus package. Remember how it had a positive impact on unemployment by preventing many more job losses?
Despite continued increases in food and energy that have pushed up a key inflation indicator from 1.7 percent in Q4 to 3.8 percent in Q1, the Federal Reserve isn’t concerned. Why boys and girls? You guessed it. The higher prices are transitory.
The average economist isn’t concerned either. The economic community remains steadfast in its belief that consumers will spend more freely as the year advances. The reasons cited included higher stock prices and the Social Security payroll tax cut, which is putting more money in people’s pockets. Economists didn’t specify whether most of that increased consumer spending would be to pay for food and energy.
But perhaps they should have done some simple calculations. Gas prices have increased about 80 cents a gallon this year. Let’s assume the average person drives 15,000 miles and gets 25 miles per gallon. At present price levels gasoline will cost an extra $480 annually. That negates the Social Security tax cut on the first $24,000 of income. The increased cost of heating and food will likely eat up the rest for most taxpayers.
So let’s hold that transitory thought, because there wasn’t any aspect of the GDP report that was encouraging. The housing sector fell 4.1 percent following a 3.3 percent rise in Q4 2010. Weather did hurt construction so transitory may aptly describe this downturn.
Growth in exports – which add to GDP – slowed to 4.9 percent, while imports – which subtract from GDP – rose by 4.4 percent. Here again higher energy prices certainly added to imports, but watch the export numbers because exports are the primary reason many companies are thriving. If export activity begins to slow we may need to get our Snuggies out of storage because we’ll be doing more than shuddering.
Business spending continued to rise but the increase slowed to 1.8 percent from 7.7 percent in Q4. GDP also got a boost from increased inventories but the question is whether the increased inventories were due to lower demand.
Wait. There was one positive note in the report: government spending dropped 7.9 percent. That didn’t help the economy but in the long run it’s a good thing. The short-term negative impact of reduced government spending is at the heart of the political conundrum related to the budget battle. Although cutting government spending is an absolute necessity, doing so in the short term could jeopardize the fragile recovery. Rock, meet hard place.
First-quarter GDP will be revised on May 26. Hopefully with better data we’ll get a better result.
In a separate announcement, the Labor Department reported that jobless claims increased by 25,000 to a seasonally adjusted 429,000. The four-week moving average also rose 9,250 to 408,500. Employment has been steadily improving, albeit slowly, so let’s hope this reversal is also transitory.
Fortunately for Mr. Bernanke, he conducted the Federal Reserve’s first ever post meeting news conference before this data was released. That was a lucky coincidence. Mr. Bernanke accomplished his goal: he didn’t make any news. The markets watched intently and moved up, as did gold. But despite insisting the Fed believes in a strong dollar, the greenback dropped a half cent during the hour-long Q & A.
Mr. Bernanke reiterated the Fed’s intention to end its bond purchase program in June but gave no indication of an imminent interest rate hike. If the Fed raised rates now to combat inflation it risks tipping the economy back into recession. This leaves the Fed little choice but to insist that commodity inflation is transitory. Rock, meet hard place.
Author, professor, entrepreneur, radio and TV commentator, Tony Paradiso is a marketing and management expert and CEO of Phoenix Finishings.