Skip to main content


JACKSON HOLE, Wyo. -- Will the


tighten again?

All we can do is keep an eye on the things they're watching most closely.

Final demand.

Final demand -- known as

final sales to domestic purchasers

in the

gross domestic product

(or GDP) accounts -- has grown at a 6% (or better) annual rate during five of the past eight quarters. (These figures are available in

Table 1 of the GDP release.) The Feds want to see numbers about half that big.

Keep in mind that they

cited "ongoing strength in demand in excess of productivity gains" when they adopted a tightening bias in May.

Then note that final demand is currently growing at a 6.3% year-on-year rate, which is notably faster than even the most optimistic wing-nut measure of productivity growth.

Final demand will have to slow significantly in order to keep the Feds from tightening further.

Productivity and compensation.


employment cost index

measure of compensation (wages and salaries) is

growing at a 3.6% year-on-year rate; the


measure of compensation (average hourly earnings) is

growing at a 3.8% year-on-year rate; and the


measure of compensation (which, unlike the first two measures, includes stock options) is

growing at a 4.3% year-on-year rate.

Every one of the published measures of compensation, then, is growing faster than the published measure of productivity, which is

rising at a 2.9% year-on-year rate.

And the gap between productivity and compensation will have to narrow in order to keep the Feds from tightening further. (See a recent

column for details about the burden on the productivity numbers from here on out.)

Profit margins.

Look for details on this either tomorrow or Thursday.

The inflation measures.

The Feds prefer the inflation measures from the GDP report to the

consumer price indices

, so it makes sense to focus on them.

The chain-type

price index for gross domestic purchases

(or PIGDPU) measures the prices of everything (including imports) Americans buy. It is the broadest available measure of the prices paid by U.S. residents (you can find this thing in Appendix

Table A of the GDP release).

This inflation measure put in a bottom over a year ago, when it fell 0.2% during the first quarter of 1998. It then went on to rise 0.4% during the second quarter, 0.7% during the third, and 0.9% during the fourth.

Then it rose 1.2% during the first quarter of this year.

Then it rose 2.1% during the second.

Also note that the core (excluding food and energy) PIGDPU shows a similar pattern of progressively bigger increases, as does the chain-type

price index for personal consumption expenditure

and its core counterpart (those numbers also appear in Appendix Table A).

The inflation measures will have to start showing littler increases in order to keep the Feds from tightening further.

Train in Vain

Follow what's going on there?

Demand keeps thumping. That tightens labor markets even further. That jacks up compensation even more, which introduces the risk that "the rise in nominal wages will start increasingly outpacing the gains in labor productivity, and prices inevitably will then eventually begin to accelerate."

And if productivity growth slows -- or perhaps simply levels out? "Unit labor costs would rise, first pressuring profit margins, and then prices."

And hey. That's the Feds talking, not your narrator.

It doesn't matter if you disagree with them; it doesn't matter if you think they're wrong.

That's what they reckon will happen.

They've handed out a checklist, and you'd best keep a pencil handy.

Scoring the game is tedious but rewarding.


It will pay during the days and months ahead to keep in mind that income is still growing at a terribly quick clip.

Disposable (after-tax)

personal income

posted a 4.9% (annual) increase during the second quarter following a 4.8% increase during the first.

Compare those performances to a 4% increase last year and a 4.7% increase in 1997.

Then note that the July income numbers to be released Friday will confirm that DPI is on track to post a third-quarter increase in excess of 6.0%.

Many market participants have lost sight of the fact that jobs and income have much more to say about consumption than do share prices.

Find it.

The huge income numbers the job market's still producing rule out a materially weaker spending picture anytime soon.

Unless, of course, Americans suddenly turn squirrel and decide to save their nuts.

Side Dish

The musical selection of the week is the first (and only)

Red Five


And there exists a distinct risk that the July

durable goods

numbers to be released tomorrow will print big.

And hey. No crying and whining if they don't.

And the poll question is: Will history end up showing


to be a hero?

Best Magic 8-Ball answer?

Without a doubt.

Signs point to yes.

My sources say no.

Outlook not so good.

Concentrate and ask again.