Mortgage rates stayed close to rock bottom all week, just above 5.5 percent. New economic data didn’t change the rate calculus, but did add substance to impressions about the current shape of the economy.
Industrial capacity utilization continued to creep up from last fall’s multi-decade low at 74 percent. In January, the in-use fraction rose from 75.8 percent to 76.2 percent. Sub-80 percent capacity figures typify recessions; but, in the 1991-92 downturn, capacity never fell below 78 percent, and was under 80 percent for less than a year. This time, capacity fell below 80 percent three years ago, and has yet to rise as high as 76.5 percent.
This persistent excess is a classic sign of our post-bubble predicament. Until we work it off, or dispose of it by obsolescence, the excess will inhibit new investment and prevent businesses from raising prices–unless in some cruel twist the Fed’s effort to induce modest reflation succeeds in recreating general inflation.
Today’s news of a 0.5 percent CPI increase in January might have raised inflation concerns, but most of the increase was due to an increase in energy costs. Back in the old days, from the first “oil price shock” in 1973 until about 2000, a spike in energy costs was considered in every financial market to be an inflation propellant. Not a harbinger or precursor; a substantial rise in energy costs meant an immediate threat to the general price structure.
No longer. The annual “core” CPI rose in a 2-2.5 percent band from 1996 to 2001, and since 2001 has collapsed in a straight line to 1 percent, concurrent with oil rising above $30/bbl and natural gas prices entering a semi-permanent explosion.
Nobody rang a bell at the moment of transition, but it has been clear in the performance of the economy and the news reaction in the bond market that increases in energy prices are today a general price suppressant not accelerant. A stable-price environment can feel like a zero-sum game in which rising prices for some goods must be offset by declines in others. At best in a stable-price world, rising energy costs act as a tax, exerting a drag on the economy.
In our Slimfast economy, record deficits are for the moment replacing the purchasing power lost through the energy price tax–a damn good thing, as the 0.6 percent total increase in real wages since 2001 won’t cover a doubled heating bill or commuting cost. Meanwhile, excess capacity prevents the energy-price increase from rippling into the rest of the economy.
What happens when we discover that we can’t afford a deficit as big as this? We will soon know.
In a Tablecloth-beats-Tigger classic, pundits are still struggling to explain last week’s reported downdraft in consumer confidence (the outline, above, for a decline in our standard of living couldn’t possibly have anything to do with it). At the top of the silly chart are consumers who’ve been demoralized by negative descriptions of the economy in the Democratic primaries.
The simple explanation is that the confidence decline matches in timing and degree the drop in Mr. Bush’s performance rating following the WMD revelation. (Since then, the Joint Chiefs have testified that they have no budget for Iraq operations after September; news that Saddam’s $5-40 billion foreign-bank stash that would be used for reconstruction doesn’t exist; and the administration yesterday repudiated its own, one-week-old promise to create 2.6 million new jobs this year.)
The Democrats are attempting to unify, but they are, after all, Democrats. The surging John Edwards is cute, and can talk a jury all the way into his wallet, but his chosen issue is the very worst of the party: protectionism. Of all the policy choices available, new job-protecting barriers are the worst, both ineffective and dangerous.
There is only one way forward: compete in the world, honestly and well.
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