Econ News by The Post:>>>Reports Show Inflation Being Held at Bay
washingtonpost.com
By Glenn Kessler and John M. Berry
Washington Post Staff Writers
Thursday , June 15, 2000 ; E01
A few more pieces of the economic jigsaw puzzle fell into place yesterday, yielding a picture of a slowing economy with little sign of inflationary pressure.
Economists said the recent batch of data adds weight to the growing consensus that a Federal Reserve policy committee will not jack up rates again to slow down the economy when it meets later this month. Instead, Fed officials who have pushed up a key short-term rate six times over the past year--raising it by a total of 1.75 percentage points, to 6.5 percent--are more likely to hold off taking more action until a meeting scheduled in August. However, if economic growth continues to slow, the Fed might leave rates unchanged then as well.
Among the news yesterday:
* The Labor Department reported that the consumer price index, the nation's broadest gauge of inflation, rose a slim 0.1 percent in May, slightly less than expected, after being flat in April. Food and energy prices are generally volatile, so excluding those items consumer prices rose 0.2 percent last month, matching April's advance and economists' expectations.
* The Federal Reserve's latest survey of nationwide economic conditions, conducted by the Fed's 12 district banks, found "that solid economic growth continued in April and May, but that signs of some slowing from the rapid pace earlier in the year are also present."
* Fannie Mae's economic outlook report for the spring and summer concluded that "the economy is fundamentally slowing." The secondary-mortgage-market giant predicted that home sales would slip more noticeably over the second half of this year.
Fannie Mae predicted "the Fed will successfully engineer a soft landing"--slow the rate of economic growth enough to reduce the threat of inflation but not so much that unemployment rises significantly.
Already, Fed officials have in hand recent reports showing slower sales of cars, homes and consumer goods, fewer new jobs and a slight rise in unemployment--gloomy stuff for ordinary workers but good news for Wall Street. Stock investors worry that if the Fed keeps increasing rates, that would make make stocks less attractive relative to bonds and thus could lower stock prices. Many economists argue that an economic "soft landing" would be the best outcome for everyone in the long term.
Argentine Economy Minister Luis Machinea, after a meeting yesterday with Fed Chairman Alan Greenspan, told reporters that Greenspan had suggested that the arguments for raising U.S. interest rates were becoming less compelling.
"Either [rates] won't go up or they will go up less," Machinea said.
"But nobody can be sure what will happen with interest rates. Not even [Greenspan]. Not even he will know for certain, he told me, until he finishes studying the indicators."
The price report showed that on a year-to-year basis, consumer prices have increased 3.1 percent, compared with 2.3 percent last year. Much of that can be attributed to a 15 percent gain in energy prices. Excluding food and energy, the CPI has increased 2.4 percent over the past year, compared with 1.9 percent in 1999.
"This solidifies the expectation that the Fed will stand pat for the next meeting," said Oscar Gonzalez, an economist at John Hancock Financial Services. "This gives additional flexibility to the Fed."
For many months, skeptics have questioned whether in today's technology-driven economy higher rates would curb growth. The latest figures suggest the Fed's plan is bearing fruit. One key reason for the slowdown in growth, analysts said, is the volatile but essentially sideways movement of stock prices in recent months, partly as a consequence of rising interest rates.
In the Fed survey, known as the "beige book" because of its cover, the Minneapolis Federal Reserve Bank said that "economic activity remains hot," but all the other banks said that in their districts, "scattered signs of cooling are in evidence or the pace of growth is slowing. Indications of worsening price inflation, while not widespread, are reported by several districts."
Even if growth has slowed, Fed officials remain concerned that the nation's very tight labor markets could eventually cause wages to rise in an inflationary fashion. At least, according to the survey summary, "the tightness does not appear to have intensified since the last report."
On the other hand, labor shortages are still found across much of the country. Nevertheless, "base wages of permanent employees are not said to be accelerating in most districts, but seasonal help and temporary workers are being recruited only with sizable raises."
Many retailers are having to pay more for workers, but generally "that wage inflation is not carrying over to prices," the summary said.
Banks across the country told the Fed banks that loan demand, especially for mortgages, has either declined or is growing more slowly. Meanwhile, residential sales and construction have slowed in many but not all of the districts. Commercial construction, on the other hand, remains very strong.
On mortgage rates, Fannie Mae predicted that if the soft-landing scenario unfolds as predicted, long-term rates may have already reached their highs for the year "although they may move up a bit from current levels over the next several months in anticipation of further Fed action." Thirty-year fixed-rate mortgages averaged 8.32 percent for the week ended June 9, down from the previous week's 8.54 percent.
The consumer price report showed energy prices fell 1.9 percent in May, even though gasoline prices in some areas have soared. Economists said the energy finding probably had more to do with timing--the report captured a decline in late April and probably missed the late-May increase--and so the next report will show an increase in energy costs.
Staff writer Daniela Deane contributed to this report.
NOT SO FAST
Amid continued strong growth, signs of slowing were evident in the Federal Reserve's survey of nationwide economic conditions:
* Kansas City, Mo.: Retail sales were flat; factory activity and residential construction slowed.
* Chicago: Growth in consumer spending softened significantly; construction growth slowed slightly.
* Boston: Some signs of slower growth, but the job market remained tight.
* Philadelphia: Retail sales leveled off, and demand for homes eased.
* Richmond: Higher interest rates helped slow growth in residential real estate, banking.
* Dallas: Overall demand remained strong, but retail sales growth slowed and residential construction declined.
* San Francisco: Solid economic expansion, with somewhat tighter credit conditions.
SOURCE: Federal Reserve
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