Waiting Out the New Era Fan Club

Are decelerating prices and accelerating growth just too good to believe?
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Teenage Fanclub

JACKSON HOLE, Wyo. --

Gross domestic product

grew 3.4% in 1996. Then it grew 3.9% in 1997. Then it grew 3.9% again in 1998.

The GDP

price index

grew 1.9% in 1996. Then it grew 1.9% again in 1997. Then it grew only 1.0% in 1998.

Those are facts: The past three years have delivered a deceleration in prices in the face of an acceleration in growth.

Is it not almost just too swell to believe?

Not if you're a New Era Fan. Fans of the New Era are convinced that a simple explanation exists for what seems to be merely a gargantuan (and once-in-a-lifetime) shipment of good fortune to us Old Fogeys. And that explanation is productivity. Technology and the information age have proven potent enough to produce a permanent increase in productivity to 3% now from 1% in the 1980s. That is why GDP has been able to grow so much faster than it could in the past without producing upward pressure on the price measures, and that is why it will continue to do so in the future.

This line of thinking has won loads of converts over the past couple of years. It's frightfully Bandwagonesque. Most of the jumpers-on were never particularly perceptive to begin with, so it's actually refreshing to see them leave -- nobody likes a jam-packed movie theater. But it is terribly sad, however, to see certain

Fed

members, the people to whom all of us entrust (willingly or not) our livelihoods, go the way of the whacked.

More depressing still is that the only way the Old Fogeys can prove the New Era Fans wrong is to wait. There are two things that just cannot happen if New Era thinking does indeed fully explain what's gone on during the past three years, and New Era Fans will continue to sprinkle New Era crap all over the rest of us until they do.

The first is that the core price measures cannot accelerate. Especially once we take food and energy prices out of the equation, there is no reason at all that they should. One of the central tenets of New Era thinking is that excess demand is in no way troublesome because it is no longer capable of producing price pressure. In other words, there is no such thing as too much growth; the facts laid out at the beginning of this column prove it.

Further, if we shouldn't expect to see any price pressure when the economy is screaming, then we certainly shouldn't expect to see any when it's whispering. If the New Era Fans are right, an acceleration in prices against a deceleration in growth is no longer a possibility.

The second thing concerns productivity. Namely, the productivity numbers will not soon decelerate if New Era thinking is indeed The Answer. New Era Fans claim that the productivity increases we have seen during the past three years owe exponentially more to the impact of the investment boom that began in 1993 than they do to the cyclical nature of productivity. New Era Fans claim that recent productivity increases are structural and permanent, not cyclical and temporary.

And no one can prove them wrong. There isn't a published productivity measure under the sun that shows even two straight annual increases of at least 3% this decade, but that by no means rules out the possibility that productivity is actually rising that much (or more). And even if such a measure did exist, the debate about how much of its increase owed to cyclicality wouldn't be settled for years to come.

But the point here is that if technology and the information age have indeed elevated productivity to a permanently higher plateau, then whatever measure one chooses to focus on sure shouldn't show decelerations anytime soon -- not now while the economy is roaring, and not later when it will whimper, not if they're truly structural.

Where does that leave us?

The first-quarter

productivity

number to be released May 11 is already guaranteed to show a sharp deceleration, and already your narrator hears New Era Fans hemming and hawing and explaining it away.

Meantime, the year-on-year increase in the

core producer price index

has accelerated to 2.2% now from nil in December 1997. The

gross domestic purchases price index

and the

personal consumption expenditure price index

both posted progressively bigger increases throughout 1998, and their core counterparts both posted bigger increases during the fourth quarter than they did during the third. (First-quarter numbers will be released April 30.)

Most New Era Fans will not even acknowledge facts like that.

And the few who do still refuse to explain why any price measure is accelerating at all if their theory is right.

Side Dish

The

Bank of Tokyo-Mitsubishi/Schroders

chain-store sales index turned in a 9.5% year-on-year increase during the week of April 3. This measure of retail sales bottomed at 3.8% during the week of Dec. 19 and has been accelerating ever since; the April 3 increase goes down as the biggest since June. Look for the slowdown types to swear that such gains are unsustainable -- and that the latest increases owe entirely to chocolate bunnies.

Consumption will soar during the third and fourth quarters. Learn it. Love it. Live it.

You

Yankees

fans are one sorry lot. What kind of warped soul can get behind a team that trades somebody like

Wells

? Very much looking forward to (a)

Jeter

and his sissy buddies ducking Wells heaters later this month and (b)

Clemens

getting close with his couch come October.

Much thanks to state university trash partner-in-crime

Finerman

for today's poll.

Favorite example of personal consumption?

John Keats.

Frederic Chopin.

Aubrey Beardsley.

Doc John Halliday.

All the Bronte sisters.