Maps and Legends
JACKSON HOLE, Wyo. --
handed us a monetary-policy roadmap in the form of a
speech he delivered yesterday.
Although it appears that there is excess demand in the labor market...
The demand for labor -- or employment -- is
growing at a 1.6% year-on-year rate while the supply of labor -- or the labor force -- is
growing at a 1.2% year-on-year rate.
...its effect has been diminished by the combination of the absence of corresponding excess demand in the product markets...
A stagnation in worldwide demand (in general) and the Asian crisis (in particular) have served to keep capacity utilization relatively low -- it recently peaked at 83.4% during the fourth quarter of 1997 and has generally been falling since. Note that capacity utilization tracks excess demand in only one sector of the product markets -- the manufacturing sector, which accounts for roughly 17% of the total. There exists nothing like a capacity utilization number for the service sector, which accounts for the other 83%.
...the residue of the long period of reinforcing favorable price shocks...
These shocks include the decline in commodity prices; the decline in oil prices; the decline in energy prices; the appreciation of the dollar and the resulting decline in non-oil import prices; sharper-than-previous declines in computer prices; and a slower rate of increase in health care prices, including the cost of health care insurance.
...and the force of the unexpected acceleration in trend productivity.
Meyer notes that trend productivity growth averaged 1% during the 1980s and reckons it has doubled since. Note that an increase in trend productivity growth means that the economy can grow at a faster rate without bumping up against the capacity constraints that would formerly have produced price pressure.
As the favorable price shocks dissipate or reverse...
All of the aforementioned price shocks save computer prices have either dissipated or reversed.
...and once trend productivity growth stabilizes...
Once. As in as soon as. As in when. Not if. When.
...there is a risk that excess demand in the labor market will put the economy on a path of rising inflation, unless growth slows enough to unwind the excess demand before inflation begins to move upward.
That's the risk -- as the Feds see it, anyway. And if you're trying to figure out where the policy rate is headed, that's the one that matters.
Meyer goes on to talk about the prospects of growth slowing enough to unwind excess demand in the labor market.
Given the momentum in sales and expectations for a stronger pace of inventory building in the second half of the year...
Final sales to domestic purchasers were
growing at a 6.4% year-on-year rate when the third quarter began -- compare that to a 5.9% increase last year -- and personal consumption expenditure was
growing at a 6.6% year-on-year rate -- compare to 5.7%. Retail sales, which rose 4.9% last year, were growing at a 9.2% year-on-year rate when August began.
Inventory building, meanwhile, even if it continues at only half its strong July pace in both August and September, will swing more between the second quarter and the third than it has at any time since 1994. A slower pace of stockpiling subtracted 0.27 percentage point from overall growth during the first quarter and then another 1.19 points during the second, but inventories are very likely to add to growth substantially over the balance of the year.
...the consensus is that growth will rebound to trend or above...
Most forecasters have growth averaging between 3.3% and 3.7% during the second half of the year against an average 3.1% during the first.
...though we have not yet seen the effects on spending of the rise in bond rates and the flattening of equity prices since the spring. This should help to slow the growth of domestic demand.
It isn't happening yet, and here Meyer sounds more hopeful than realistic. Sales of interest-sensitive goods like vehicles and houses continue to set records in the wake of the rise in rates, and stock indices still sport year-to-date gains as big as 28%.
Also keep in mind that the Feds have been
waiting on the slowdown thing for some time now.
And that economies do not just up and slow materially and permanently all on their own.
And that economic expansions do not die of old age.
Meyer ends the roadmap discussion with the following nugget.
Although there is some risk that growth could remain above trend and therefore aggravate any initial excess demand, a major concern remains that the prevailing balance of supply and demand in the labor market might put upward pressure on inflation, even if growth slows to trend ahead.
And man is that key.
Most market participants seem to be operating on the assumption that the cost-price measures cannot accelerate while growth decelerates -- that pressure on prices and costs will at once stop intensifying when growth begins to slow.
Meyer is telling you that that ain't likely.
It didn't play out that way during 1994-1995. Between those years growth decelerated to 2.3% from 3.5% while core consumer inflation accelerated to 3% from 2.6% (and service-price inflation accelerated to 3.5% from 2.9%).
Tell me about the rabbits again.