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To: Ray DeMoss who wrote (14489)	7/14/1998 4:36:00 PM
From: Alex	Respond to of 116770

Watching out for inflation Services sector will be first to show price pressures By Lester C. Thurow, 07/14/98 The current lack of inflation, or even deflation if one looks at price indexes excluding the health care sector, is often portrayed in the press as a major mystery or a minor miracle whenever a yet lower unemployment rate is announced. It is neither. Part of the explanation for this good performance is found in the fact that there were a lot more people looking for work in 1994 (the year unemployment hit 6 percent - the point at which many economists, including those at the Federal Reserve Board, said inflation would reemerge) than were being measured in the official unemployment rates. From 1994 through the first quarter of 1998, 1.5 million people have left the unemployment rolls, but employment has grown by 7 million. Five and a half million workers entered the labor force despite that we are now in a period with very slow growth in the native-born work force. Some were immigrants (legal and illegal) and some were native-born Americans who did meet the Labor Department's tests for being unemployed - but all were in fact anxious to take a job when one could be found. What was measured officially as a 6 percent unemployment rate in 1994 was really closer to 10 percent. We will know that the current expansion has hit its limit not when the official measured unemployment rate reaches some magic limit, but when increases in employment are matched by equal declines in officially measured unemployment. Part of the unexpectedly good inflationary performance is found in globalization. Name any product. Add up the amount the world can produce. Subtract what the world is going to buy. And you will find that the world production exceeds world consumption by at least one-third. Autos, semiconductor chips, and oil are just three of the many examples. With such an overhang of production capacity, no one can raise prices. If a company did, someone else would step in with the same product at lower prices and take the firm's market away. American prices are now determined globally, and the Asian crisis has strengthened these downward global price pressures. Countries in the meltdown such as South Korea and Thailand have to export more, and they can do so only by lowering prices. If their American competitors do not want to lose market share, they have no choice but to do match the price declines. With Japan (an economy five times as big as the rest of East and Southeast Asia) now joining the Asian meltdown, these downward price pressures are going to increase enormously. With its GDP falling and its currency plunging, Japan finds its domestic markets shrinking and its opportunities to profitably export at lower prices rising. American companies facing Japanese competition are going to be in for a very tough time. This will do bad things for the companies' profits and stock market values but very good things for America's price indexes. The economy's inflationary performance in 1998 is apt to be even better than it was in 1997. Downsizing and outsourcing have also played a role in the good inflationary performance. It is common today for companies to have signed contracts with their suppliers that require annual price reductions. Mandated 3 percent annual declines are common. It is simply easier to get tough on prices with an outside supplier than it is with an inside supplier. If an outside supplier doesn't make any money that is his problem; but if an inside supplier doesn't make any money, what the corporation gains in one of its buying divisions it loses in its selling divisions. With component prices falling, final selling prices cannot be far behind. Those looking for incipient signs of inflation should watch the services sector. Since many services cannot be imported, foreign producers do not hold domestic producers' prices in check. As America's low-wage sector, it is services that first run out of labor. Manufacturing, mining, and construction have huge reserves of available labor at current wages, because many of the laborers now working in the services sector would be delighted to quit their current service jobs and move into higher-paying jobs. But as yet there are no signs of inflation in the services sector. Lester C. Thurow is professor of management and economics at the MIT Sloan School of Management. This story ran on page D04 of the Boston Globe on 07/14/98. c Copyright 1998 Globe Newspaper Company. boston.com