It’s one thing when consumers grumble about inflation. It’s quite another when Ben Bernanke, chairman of our Federal Reserve Board, tells an audience in Massachusetts that “the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations,” and that the Fed “will strongly resist an erosion of longer-term inflation expectations.”
For investors, that means, “I will raise interest rates if the slowing economy does not ease price increases.” And for consumers, Bernanke’s statement means, “Don’t look for lower mortgage rates or a cut in charges on your credit card balances very soon.”
The chairman’s concerns are not unfounded. Consumer inflation is running at an annual rate of 4.2 percent, unless, of course, you neither eat nor drive, in which case the lower “core” rate of 2.3 percent (excludes food and energy) applies to you.
Developing countries, which have been providing Wal-Mart with low-priced imports to keep consumers’ costs down, are now raising their prices in response to domestic inflation. So apparel prices, which have been tame, might start to rise when back-to-school outfitting begins.
It would not be so much of a worry if the inflationary pressures were due to a booming economy. They aren’t. But neither is the economy certainly headed for the disastrous bust that the bulk of the media is predicting in an attempt to support the multibillion-dollar spending plans of media darling Barack Obama.
The picture is mixed. Bernanke has used all of the tools available, and invented new ones, to prevent the credit crunch from morphing into a major recession.
And he believes that because of his aggressive interest rate cuts “the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”
The latest retail sales figures, released after Bernanke’s speech, support the Fed chairman’s views. The increase was twice what analysts were expecting.
It seems that more than was anticipated of the $56 billion in tax rebates distributed so far is ending in shop tills. “It’s just amazing the American consumer’s resilience in the face of everything negative,” Stuart Hoffman, chief economist at PNC Financial told Bloomberg Television.
That doesn’t mean that we can safely ignore the word “substantial” in Bernanke’s statement that the risk of a substantial downturn seems to have diminished. That still leaves room for a non-substantial downturn, which is under way.
The Fed’s monthly report on business conditions around the country is dotted with “softer, weaker, … slower, sluggish” from seven of the 12 Federal Reserve districts; the five others report “stable” activity. And highly respected Martin Feldstein thinks the economy will weaken — “We’re heading for a recession,” he told a meeting of investors.
The dominant worries are gasoline, housing, and banks. Although gasoline on average claims only about 4.5 percent of consumers’ budgets, these prices are posted on huge signs that we see several times every day, accounting in part for the decline in consumer confidence.
And the 4.5 percent is only a nationwide average: Even a tall person can drown in a lake with an average depth of 3 feet. Commuters in the District’s suburbs spend more on gas than, say, walk-to-work New Yorkers, and are especially hard-hit.
Housing remains a problem. Large inventories of unsold houses overhang the market, and prices continue to sink. The only thing going up is the number of foreclosures, and not only in the subprime market.
But all is not gloom. In April, the number of signed sales contracts rose to its highest level in six months. Hold the applause: One month does not make a trend, some of those contracts might get canceled, and signings were still 13 percent below last year’s at this time.
The banks seem to be edging toward improved circumstances. They are selling off their worst paper, albeit at deep discounts, and raising capital, albeit by paying a handsome price for it.
When investors are convinced that the last shoe has dropped — that the banks have finally confessed to all of their losses — they should be able to begin lending at a more normal pace.
All this adds up to an economy that is treading water but not sinking. Whether the economy will stay afloat when the boost of the stimulus checks wears off will depend on whether gasoline prices come down and house prices stop doing just that, the banks have strengthened their balance sheets enough to start normal lending, and consumers continue spending.
