National Post
(formerly The Financial Post)
August 16, 1999 Monday NATIONAL EDITIONS
SECTION: FINANCIAL POST INVESTING; Pg. C11
LENGTH: 983 words
HEADLINE: Tales of shortages go unheeded: Conclusion belies tone: Beige Book greeted as good news by treasury market
BYLINE: Caroline Baum
DATELINE: NEW YORK
BODY:
NEW YORK - Twenty-five 'shortages,' nine 'lacks' and six 'constrains.' These are not the kind of words that will allow U.S. Federal Reserve chairman Alan Greenspan to relax.
Last Wednesday's release of the Fed's Beige Book, a compilation of anecdotal evidence from the 12 Federal Reserve districts, was greeted as good news by a treasury market that was already pleased with itself for underwriting a successful auction of 10-year notes.
But the Beige Book's conclusion that 'there is no evidence of any broad-based pickup in consumer price inflation' belies the overriding tone. Rarely have there been so many references to the potential for inflationary pressures in such a consolidated space.
Here's a sampling:
- Widespread labour shortages persist in virtually every district.
- Shortages of materials, labour,and available land have constrained home construction, delayed projects and boosted costs.
- Output of industrial equipment and home-construction materials is being limited by shortages of raw materials and labour.
- Supply constraints are limiting growth [of housing activity] in many areas.
- Many districts also report problems in obtaining key construction materials.
- Home sales in Boston, New York and Atlanta are being limited by construction bottlenecks, combined with low inventory of existing homes.
- Retailers, including restaurants, report labour shortages in New York, Philadelphia, Richmond, Va., and Kansas City. San Francisco notes a shortage of seasonal agricultural workers.
The Beige Book did note that employers are dealing with the labour shortages in creative ways, using incentives, bonuses, job-security commitments and even international recruiting, in the case of truckers. And in spite of widespread shortages in virtually every district, 'there have been only scattered reports of an actual acceleration of wages,' the book says.
What does all this mean for the Fed? To the extent that the tales of shortages appear in the Beige Book, not much. The Fed's key briefing books are green (the economic forecast) and blue (the monetary policy options).
To the extent that the information accurately reflects economic conditions, it matters a lot.
'It confirms the sense that things are stretched, even if pricing power and inflation psychology are no longer there,' says Bob DiClemente, chief U.S. economist at Salomon Smith Barney. 'Everything is in place for an acceleration in inflation. The only thing holding us back is the decline in inflation expectations, which is to the Fed's credit.'
When we last heard from Mr. Greenspan in his monetary policy reports to Congress, he was in pre-emptive mode. 'If new data suggest it is likely that the pace of cost and price increases will be picking up, the Federal Reserve will have to act promptly and forcefully so as to preclude imbalances from arising that would only require a more disruptive adjustment later,' he said in his July 22 testimony.
He went so far as to set up a conditional relationship to guide us. 'Should productivity fail to continue to accelerate and demand growth persist or strengthen, the economy could overheat,' he said.
Overheating means action. Unfortunately, he didn't give us a time frame. Non-farm business productivity rose 1.3% in the second quarter, compared with 3.6% in the first.
The quarterly productivity numbers are volatile, not to mention that productivity has a large cyclical component: it rises with economic growth. The Labor Department's measure of second-quarter output was less than half that of the first quarter, a decline not matched by hours worked. So productivity growth slowed.
On a year-over-year basis, it's another story. Non-farm productivity growth accelerated to 2.9% in the second quarter from 2.7% in the first. With one exception -- in the second quarter of 1996 -- that's the highest in 6 1/2 years.
So much for the first half of Mr. Greenspan's conditionality. The other half, demand growth, is subject to timing, too. Retail sales for July suggest consumers have downshifted to a slower spending path after six consecutive quarters of registering 4% or more. It used to be that consumers would take a rest every few quarters. While retail sales rose 0.7% and 0.3% excluding autos last month, the guts of the report were disappointing.
'The trend in core spending on goods has decelerated markedly since early spring,' says John Youngdahl, economist at Goldman, Sachs & Co.
Increases in gasoline and food prices are considered to be a price effect, not a reflection of a change in sales volumes. Gasoline service station sales rose 1.2% in July while food store sales rose 0.1%.
Secondly, Mr. Youngdahl points out, the 2.3% increase in auto sales does not gibe with the slight dip in unit auto sales reported by the industry.
Excluding autos, building materials and gas to arrive at a measure that approximates the Commerce Department's 'retail control' (used to compute consumer spending in the GDP report), sales edged up a scant 0.1% in July and are up at a sub-3% annualized pace in the third quarter. That compares with 11.8% and 6.4% increases in the first and second quarters, respectively.
Is this the pause that refreshes or the pause that extends? Certainly some of the prerequisites for consumer spending -- strong job and income growth and confidence -- are still in place. The stock market, while causing nervousness on Wall Street, does not seem to be a big factor on Main Street.
So where does that leave the Fed? Mr. Greenspan said it best last month. 'In the face of uncertainty, the Federal Reserve at times has been willing to move policy based on an assessment that risks to the outlook were disproportionately skewed in one direction or the other, rather than on a firm conviction that, absent action, the economy would develop imbalances.'
This appears to be one of those times.
|
