Even though I'm not scheduled for a column on Monday, I'm still here examining every bit of economic data, looking for some clues in this muddle we seem to be in. The stock market has been in a tizzy, and everyone knows for sure, supposedly, that the Fed is in for a 50 basis point cut when it meets next week. It's times like these that you should be certain of nothing and prepared for anything. -->

Even though I'm not scheduled for a column on Monday, I'm still here examining every bit of economic data, looking for some clues in this muddle we seem to be in. The stock market has been in a tizzy, and everyone knows for sure, supposedly, that the Fed is in for a 50 basis point cut when it meets next week. It's times like these that you should be certain for nothing and prepared for anything.
Here are recent economic numbers:
December retail sales were down -0.4%, and many of the nation's largest retailers like Kohl's and Target had the disappointing sales to prove it. As the nation's population gets older, however, they are more likely to spend money on gifts such as travel. This is not as good an indicator of the economy's health as it used to be, but the fact that it was down shouldn't sit well with anyone. Even excluding autos, this was down -0.4%. November's report was strong, and this may have evened things out. It was an exceptionally long Christmas and holiday shopping season, with more days than usual in November, so some of this could be a fallout of the peculiarities of the calendar.

The Producer Price Index (PPI) was +6.3% for finished goods. Over the years, the PPI has been higher than consumer prices. Those price increases were covered by greater productivity among the companies using the products, or gaining economies in some other way, or by increasing sales of goods. Remember, inflation measures only tell us about the price, not about the quantities sold. If prices go up, but sales are lower, that means that fewer people have actually experienced those price increases, and they usually spend the dollars on something else.
The Consumer Price Index was +4.1% for the year; the spread for the PPI and CPI may be narrowing. Consumers we benefitting from economies achieved in some other way. That period seems to be ending, and inflation in the PPI is not being counterbalanced by economic growth or productivity.
The Federal Reserve released its Beige Book which forecast slower economic conditions but did not forecast a recession (they never do). One nice thing about the Beige Book is that it includes reports of economic conditions from its regional banks. Since printing is still primarily a regional industry, this can be more helpful than general economic information. There are even tidbits like more Canadians taking advantage of the exchange rate to buy their new cars from Minnesota car dealers.
Our forecast is still one of stagflation, with slow economic conditions in the +2% GDP growth range for the year, and higher inflation. While 5-6% inflation might be extreme, it is possible. We've started to think that 4-5% inflation will be the most likely case. The Fed is likely to lower interest rates next week, and while claiming it will stabilize the economy, the new money will only decrease the dollar against other currencies and increase inflation.
The Fed also released its industrial production report, and it was better than anticipated for the general economy, with a +1.5% increase compared to December 2006. The printing figures in the report were not encouraging. It looks like shipments in December 2007 were -4% less than they were in 2006, capacity utilization put in its worst showing since October 2005, at the same time that available capacity increased went up at a rate greater than that decline. This does not bode well for the beginning of the year, which is usually slow until March.
The “stagflation” word is even being uttered in Europe. The European Central Bank does not take kindly to inflation. If they decide to tighten, or just decide to keep things where they are while the U.S. continues to loosen, look for fears of European recession to spread, as economic pressures push the dollar lower, and spawn complaints from the Eurozone about U.S. monetary policy hurting the world economy.
On a more positive note, the Heritage Foundation, in conjunction with the Wall Street Journal, has released their annual Index of Economic Freedom. This is a superb 400+ page analysis of the worldwide economy with details of the workings on a country-by-country basis. Best of all, it's a free download. With all this talk of rising prices, something this good being free is outstanding. A good summary of the report was in the WSJ, which includes a ranking of the 157 countries profiled. The top ten countries and their category ratings can be viewed online; they are: Hong Kong, Singapore, Ireland, Australia, United States, New Zealand, Canada, Chile, Switzerland, and United Kingdom. I've always liked it because it describes whether or not there are black markets or corruption in the course of doing business in a matter-of-fact way, just like all the international sales reps I once knew used to talk about at a weak moment. The usual economic and demographic data such as population, inflation rates, GDP size, and others are all conveniently included. I highly recommend it, and you don't even have to wait for it to go on sale.
Monday is Martin Luther King, Jr. Day. I vividly remember being on a school bus and overhearing the Tony the driver's radio with the latest reports. I had seen the TV accounts on the CBS Morning News with Joseph Benti; yes, I was a news junkie even then. As I've gotten older, I find it all the more amazing all that MLK accomplished by the time he was just 38. At the time of his assassination, I was 12; Like most kids I knew for certain that 38 was really, really, very old. Today, many careers have barely started at the age MLK's ended. It makes one appreciate not just his short life, but that every day is a gift and you should make the most of every one.