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Economics & Research Blog

The Sky's Not Falling, It's Just a Little Loose


By Dr. Joe Webb
Published: October 2, 2007

Yesterday, the ISM Manufacturing Index fell to 52 from last month's 52.9. The inflation component of the index went down, and the employment component went up. In all, it still paints a manufacturing index slowing down. Good thing the Fed cut rates.
The stock market has been going strong. We're actually getting close to an inflation-adjusted all-time high, which would be 14,154. As I write this, it's in the 14,050 range. Anyone who invested in CD's at 5% in early 2000 did better than the market. Anyone who started buying at the recent bottom (inflation-adjusted would be 8,421 in 2002) you've almost doubled your money in five years. Not bad. Certainly beats those CD's.
There is a great deal of speculation about Friday's employment report (umm, when is there NOT speculation?), and the general consensus is that it be be okay at best.  Employment is declining, the fear mongers are stating. Aren't we at theoretical full employment? and even if it went close to 6%, we'd be in the full employment range as well. It's funny, but when I was digging into the economics books in the late 1970s, and then in my MBA program, some of the textbooks had started to change their estimates of full employment to 6% to 8%. Now it's back in the 4% to 6% range in most texts. But it's still hard to break people of the habit that assumes that strong employment equals strong inflation, and heaven forbid anyone get a wage increase, because that's supposedly inflationary, too.
I finally dug into some of my favorite reports, and the household wealth report from the Federal Reserve showed that it reached a new level of almost $58 trillion. That's about $450,000 per household. Real estate holdings declined in value, but equity holdings went up. As a rule of thumb, households have about 1/3 of their wealth in real estate and 1/3 in equities. The remainder is in a smattering of things. Households are more diversified than they realize, and more than the government reports. The household wealth report looks at the value of all assets, and they are still going up. When one segment goes down, another one goes up. When the government reports the savings rate, however, they do not include retirement plans like IRAs and how their value changes. Assets are assets, and they are easier to convert to cash than ever in history. Yet the idea that there is a dangerous negative savings rate persists just like the myth that trade deficits are fatal.
There's a great chart of inflation-adjusted gold prices that should get everyone to calm down already and go about their business. Note that we're at 1970s levels, which were the time when Richard Nixon kept urging Arthur Burns to increase the money supply aggressively. Paul Volcker might be the best Fed chair in our lifetime, despite the awe for Greenspan. Volcker wouldn't be bullied by anyone, and cleaned up Burns' mess. That doesn't mean that Burns was a bad guy... after all, his doctoral work involved one of my favorite forecasting methods, pressure curves. Unfortunately, no one uses them anymore. I first saw them at PrintOutlook '82. I had hair then.

What's different now? Is the increasing gold price a monetary problem or a change in supply or demand? For some reason, people still insist gold is an inflation hedge, but just from looking at the chart, it's a bad long-term investment, and it tells us that inflation is rather tame in the long term. In my mind, it's not a monetary issue at this time, it's part of the growing demand for gold as a commodity. It will pass.
The Wall Street Journal had an interesting article about how $100 oil will be shrugged off by the markets. It can be, but not without planning and preparation. While $100 oil will not be an all-time high at all, especially when you adjust for inflation and productivity, its a reminder of one important management truism: "what have you done for me lately?" With all prices, it's what was the price lately, and not even two years ago, let alone 27 years ago. The article has a good analysis of exchange rate effects on oil prices.
And speaking of commodity prices (which are up 50% in the past three years or so), why is it that I read, even from overseas publications, that everyone wants to avoid print becoming a commodity. Our industry could use a good 50% price increase, don't you think? Maybe we should think of another word. (Yeah, I know I seem to mention this every time I speak, but perhaps the repetition will get the idea to sink through).
Tomorrow we get the ISM non-manufacturing index, and that's always run higher than the manufacturing index. We get printing shipments for August  on Thursday.
See? There's enough good and bad news to satisfy everyone. So the sky's just a little loose. No need to panic. Just take a look up every now and then to be sure.

Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink's Economics and Research Center.



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