Agree - GDP/ECI will help determine whether this 'slow-down' is the start of a trend.
One of my concerns (about inflation) is addressed in the article below:
Energy Price Increases Are in the Pipeline: Economic Outlook
By Art Pine
Washington, July 17 (Bloomberg) -- For many Americans, the most visible sign
of mounting inflation pressures these days has been the sticker-shock they've
been experiencing at the gasoline pump. Since February, the price of a gallon of
auto fuel has soared by 25 percent -- to $1.63. A year ago, it averaged $1.18.
But consumers -- and businesses -- haven't seen anything yet. Airline fares
already are up at an 18 percent annual rate this year, although Southwest
Airlines Co. and US Airways Group Inc. sparked a round of fare cuts across the
industry last week. Increased freight charges from trucking companies helped
push food prices higher by 0.5 percent in May. Energy prices are expected to
send the consumer price index for June -- due out Tuesday -- soaring by 0.5
percent. That would be the biggest rise in three months.
The energy surge isn't limited to oil and gasoline. Natural gas prices also have
climbed -- to $4.16 for each million BTUs of energy, from just $2.20 in January.
Some analysts say heating-oil prices -- now 77.8 cents a gallon -- could double
by year-end because inventories are so low.
``There's a substantial amount of inflation that hasn't hit the system yet'' --
enough to push the overall rate of consumer price increases as much as 2
percentage points above the current 3.6 percent annual pace, said Philip K.
Verleger, an energy economist at the Brattle Group in Cambridge,
Massachusetts.
That's because higher oil prices have begun to spill over into producer prices of
other goods made from petroleum -- fertilizers, paint, chemicals, plastics and
resins -- which are ``precursors to an awful lot of products,'' according to Joel L.
Naroff, president of Naroff Economic Advisors, Inc.
Effect on the Fed
If the ripple-effect of the oil-price rise proves that powerful, it could, in turn, lead
Federal Reserve policy-makers to raise interest rates for a seventh time in the
past 13 months, crimping the economy in the process, Verleger said. An
economic squeeze -- or even a mild recession -- could be the result.
President Bill Clinton warned last month that unless gasoline prices stabilize
soon, the impact will ``rifle through our economy,'' imposing a significant burden
on consumers. Pump prices have fallen since, but they're still higher than in any
recent period except for the few weeks before the president spoke.
Warnings about the impact of the oil-price increases fly in the face of
conventional wisdom. Many analysts contend that America can't be hurt as badly
today as it was following the price surges of the 1970s and '80s. Oil accounts for
only 2 percent of the economy now -- compared to 6.5 percent in 1981.
David Wyss, an economist at Standard & Poor's DRI in Lexington,
Massachusetts, argues that because of that, the price jumps so far should only
add half a percentage-point to the ``core'' rate of inflation -- a measure that
excludes energy and food costs. That's about one-fifth of what they did in the
1981 surge.
Secondary Effects
But the Brattle Group's Verleger argues that while energy isn't as big
proportionately it was two or three decades ago, it still is central to millions of
pricing decisions across the economy. He predicts that rising transportation
costs, for one, ultimately will spawn widespread secondary price-hikes.
The rub is that, given what has transpired so far, there's little the government
really can do about it -- at least not now.
Washington could try to limit demand -- either by limiting production of
sport-utility vehicles, or SUVs, which analysts say account for much of the past
year's increase in gasoline- purchases, or by imposing some price controls. But
policymakers fear that both would backfire.
Moreover, OPEC ministers and American SUV-owners aren't the only players in
the oil-price drama. Lulled by unusually low oil prices, oil companies allowed
their inventories to run low. Refinery capacity also is tight, and no one is building
new ones. ``Not in my backyard,'' many states and localities protest.
By far the most efficient solution, some say, would be to let the market do its
job. When prices get high enough, Americans will stop driving as much, they say
-- and possibly even lose their appetite for SUVs. Oil prices will begin falling
again. That's what broke the cartel in the 1970s, and it's apt to work again.
What problems the oil situation will pose for policy-makers is a matter of debate.
Chance of Recession
Robert DiClemente, an economist for Salomon Smith Barney, Inc., warns that if
oil prices remain high for very long, the ripple effect will be significant, prompting
consumers to begin to cut back their spending sharply or else prodding the Fed
to boost interest rates. Either one would increase the risk of recession.
But DiClemente sketches another scenario -- that the spate of price increases
economy-wide will boost inflationary expectations and prompt both sides to
factor them into their decision-making. That, in turn, could sow the seeds for a
new round of wage-and- price inflation.
Indeed, the oil price increases combined with rising prices of other commodities
-- metals, electricity and some agricultural goods -- could prove a spoiler. One
reason the current expansion is a record nine years old and counting has been
the absence of any broad rise in commodity costs -- a bugaboo to long
expansions.
More recently, however, commodity prices have begun to rise. Copper is up
almost 10 percent from its mid-April low of the past year. Platinum -- a
component of automobile exhaust systems as well as jewelry -- has climbed
more than 41 percent this year.
Slower Growth
While the U.S. economy probably slowed to a 3.5 percent annual growth rate in
the second quarter from a 5.5 percent pace in the first three months of the year,
economists surveyed by Bloomberg News expect the growth rate to accelerate in
the current third quarter. Europe is picking up, as well, and Japan's two-year
recession may have ended. So price pressures are apt to increase.
All that may not happen, of course. Demand for gasoline could slow quickly if
American motorists see the handwriting on the wall. The oil-producing countries
could have second thoughts about hewing to their current price targets. And the
weather could work favorably to ease the rise in heating oil.
There's also the silver-lining forecast: If oil prices fall to between $20 and $25 a
barrel -- from above $30 a barrel now -- the drop could offset other price increases
building in the rest of the economy. That, in turn, might persuade the Fed not to
raise interest rates further.
But the jury still is out. Saudi Arabia's decision last week to boost oil production
to help hold oil prices at about $25 a barrel may help bring gasoline prices down
a few pennies later this year, but it isn't expected to push crude oil prices down
to 1999 levels. And heating-oil prices are expected to soar, no matter what.
Verleger, for one, thinks it's worth being on guard on the energy issue and to
resist being lulled by the good fortune that Americans enjoyed for years when oil
prices were so unusually low. In February 1999, when oil sold for $10 a barrel,
analysts warned that the bargain-basement price wouldn't last. It didn't. |
