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Is the US economy facing an imminent recession?
Gerard Jackson
The US economy is certainly confounding a lot of commentators. It is being argued that falling prices on consumer goods are curbing inflationary pressures. Early this month the government reported that CPI for October fell by 0.6 per cent. Adjusted for food and energy prices the CPI registered a 0.1 increase, an average rate of 1.2 per cent. Moreover, the price of steel is also falling, leading some commentators to claim this is exerting a downward pressure on a variety of consumer and capital goods. This view appears to be supported by a fall in the Producer Price Index. All of which, according to Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI, is due to a intense competition that prevents business from raising prices. (Alas, if only it were that simple).
To add further spice to the current mix of economic commentary the US trade deficit dropped by 6.8 per cent in September to $64.3 billion. According to the Census Bureau this is the biggest-one-month fall since February 2001. What seems to have been drowned by the noise is the fact that February 2001 was a recession year. What I find interesting is the fall in demand for imported consumer goods. Of similar interest is falling prices for a range of commodities including steel, aluminum, copper, etc. Mr. Meckstroth interprets these price falls as “a pause in demand, which is giving supply a chance to catch up”.
An ominous sign reported by the Labor Department is that productivity went flat during the July-September quarter, even as wage pressures began to accelerate. The last year saw has witnessed the fastest increase in labour costs since 1982. Naturally some commentators believe that this will cause the Reserve to raise interest rates to fend off inflation. That the labour situation might be the result of an inflationary monetary policy never occurred to these people.
Frequent readers will know that according to the Austrian school of economics the emergence of a recession is first felt in the higher stages of production while the lower stages continue to boom. The Institute for Supply Managers has some interesting figures on this phenomenon. According to an Institute report for October the top performing industries are:
Utilities; Information; Retail Trade; Finance & Insurance; Public Administration; Health Care & Social Assistance; Management of Companies & Support Services; Educational Services; and Wholesale Trade.
The reader will note that no manufacturers are included among the top performers. In addition, the ISM Series Index for October revealed a downward movement manufacturing compared with September.
As is par for the course, money supply figures have been completely neglected by the economic commentariat. From January 2001 to November this year M1 expanded by 25 per cent. I believe that this expansion drove the boom in housing and imports. It follows that if this is true then a monetary contraction, if persisted with, should have the reverse effect. The Federal Reserve’s monetary statistics show that from last January to early November M1 suffered a slight fall of 1.5 per cent while demand deposits dropped by 9 per cent. At this point we should pause and take note that from January 2000 to the following November bank deposits fell by 8 per cent. A short time later it was acknowledged by the economic commentariat that the US was in recession, which, naturally, the Democrats and their media cronies blamed on Bush.
I think it’s fair to draw the conclusion that it is the current monetary squeeze that’s exerting a downward pressure on prices and imports, and not increasing competition. There are two other serious omens that must be taken account of and that’s the sudden drop in productivity and the rapid rise labour costs. It has been observed that the same phenomenon occurred in the nineteenth century, particularly the first half, and was greatly commented on.
Whether these statistics indicate an impending recession I cannot say at this juncture. For that reason I am not even prepared to offer a tenuous conclusion. One must also take into account the Federal Reserve. Although there is much talk at the moment about the Fed raising interest rates there is the distinct possibility that it would cut rates and reverse monetary policy if it felt the economy was sliding into recession. This is what the Fed did in 1924 and what the Reserve Bank of Australia did in 2001 when it sent M1 rocketing by 22 per cent and bank deposits by 25 per cent.
Unfortunately, any downturn in the economy will be immediately blamed on President Bush, as was the last downturn, by an ideologically corrupt media that sees its role as one of destroying Republicans irrespective of the cost to the country.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 27 November 2006