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Read the Mouth's Lips: No New Slowdown

Don't look for any kind of Brazil-type crisis to have the same impact on prices this year as Asia had on them last year.


JACKSON HOLE, Wyo. -- Notes on the

producer price index


The producer price index measures average changes in prices received by domestic producers of commodities in all stages of processing. Compare that to the consumer price index, which measures average changes in prices paid by consumers for a representative basket of final goods and services.

With the release of January data, a service industry -- life insurance carriers -- was introduced into the PPI sample for the first time.

The PPI rose 0.5% last month. You will hear that this increase came almost exclusively as a result of the slaughter hog index (up a whopping 188.6%); the gasoline index (up 6.5%; yes, up -- the PPI measures prices received, remember); the fresh fruits and melons index (up 19.6%); and the prescription pharmaceuticals index (up 1.4%). And know what? It did. You will also hear that the "core" PPI, which excludes the food and energy indexes, fell 0.1%. And know what? Again, it did.

And know what? Big deal -- in both cases.

Want to ignore food and energy prices altogether? Fair enough -- lots of people argue that volatility in those sectors makes it damn near impossible to discern an underlying price trend. Know what? They're right. And know what else? Absent those factors, the trend in core producer prices is as clear as an azure sky of deepest summer. Matter of fact, it's been deteriorating for more than a year. The core PPI was falling at a 0.1% year-on-year rate back in August 1997; it's rising at a 2.3% rate now.

Here the deflationists will jump in to point out that the core intermediate materials and the core crude materials indexes, which measure the prices received by producers at the very beginning of the production pipeline, are still falling at 1.6% and 14.5% rates, respectively. This fact, they will argue, means that the deterioration in the aforementioned core finished goods index is bound to reverse soon.

And know what? They might well be right.

But there are a couple of other things to consider. First, a note on

import prices


Import prices rose 1.0% in 1996. Then they fell 2.4% in 1997 -- July of that year marked the beginning of the Asian crisis, remember -- and went on to drop another 6.0% last year. But Wednesday, the


reported that they

rose 0.2% in January -- that marked their third increase in five months following a 20-month period that delivered only one increase. Further, the year-on-year decline in import prices, which was clocking in at 6.3% a year ago, has since moved to 4.7%. Bottom line? Ever-kinder help from import prices is a thing of the past.

Now. Back to the deflationists. They have no problem granting that the trend in both the core finished goods index and the import price index has turned. But they hasten to add this: A worldwide slowdown in growth in general -- and a smart smack from Brazil and the rest of South America in particular -- will soon turn that trend right back.

But know what? It just ain't gonna happen.

Last year, oil prices plummeted 36.5%, and the trade-weighted value of the dollar surged 7.4%. Think that's likely to happen again? Don't.

Last year, world gross domestic product slumped to 1.8% from 3.2% in 1997, including a plunge in growth in developing countries to 2.0% from 4.8%. Think that's likely to happen again? Don't. Growth in the Asian crisis countries already plunged to 0.1% in 1998 from 8.0% in 1997. Last year was ground zero, folks. Maybe world GDP growth won't accelerate at all this year; maybe it will come in at only 1.0%. But the point is that it ain't gonna decelerate by as much this year as it did last year.

What about Brazil? And South America? Yeah, well, news flash, kids: Brazil accounts for a whopping 2.2% of U.S. exports. Throw in the rest of the continent, and the number rises to 8.5%. Care to guess the portion of our exports for which the Pacific Rim countries account? 23.6%.

Anyone claiming that a new slowdown -- one that begins with Brazil or any other country -- is going to have the same impact on prices this year as Asia had last year still has no clue about what happened to the American economy in 1998.

Uh ... Oh Yeah


Mister Chicago


A month ago, he was citing huge January claims numbers as evidence that the economy was slowing materially, at which point your correspondent

advised ignoring such nonsense.

Thursday, the BLS reported that the claims trend (its four-week moving average) just hit its lowest level since February 1989.

Chicago's reaction?

With the unemployment rate at 4.3%, the low level of claims is not strange at all.


Go Dog Go

The table below shows some recent money growth rates for three different "economies."

One of them is growing at a 4.2% year-on-year rate, one of them is growing at a 2.7% year-on-year rate, and one of them is contracting at a 3.6% year-on-year rate.

No points for guessing which is which.

Side Dish

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