Wednesday, July 16, 2003

The economic data released today tells the continuing saga of economic stagnation and threats of deflation.

First, industrial production ticked up slightly in June by 0.1%. Manufacturing rose 0.4% but was offset by a sharp -3.5% change in utilities output. Total industrial capacity remained stuck at 74.3%, again the product of a slight improvement in manufacturing (from 72.6% to 72.8%) and a sharp decline in utilities (from 83.4% to 80.2%). On a quarterly basis, industrial capacity in 2003:II was down notably from 2003:I. At 74.3%, industrial capacity continues to decline by quarters and is at its lowest point since 1983:II. Despite the small rise in June, the same goes for manufacturing, which also continues to decline by quarters and in 2003:II is also at its lowest capacity utilization rate since 1983:II.

This is clearly not an economy which can profitably utilize more capital investment.

Second, consumer prices in June rose 0.2%, but the more important story is in core CPI which remained flat. This was the third month this year that core consumer prices did not rise at all, and for the first half of 2003, core inflation stands at 0.8%, even lower than the last six months of 2002. Over the past 12 months, core inflation in the US is running at a mere 1.5%.

Thus it was entirely appropriate that Greenspan today said, in his usual obscurantism, that deflation would "continue to engage our attention". Yet despite the Fed's commitment to ultra-low interest rates into the foreseeable future, the 10-year treasury yield continued its recent ascent, at 3.95% from its mid-June trough. That makes a nasty potential combination of rising interest rates and falling prices -- a witches' brew for capitalism.

It continues to stun the General how all this news can be seen as downright rosy by particularly dimwitted economists like Mark Vitner of Wachovia Securities or pundits like Alan Webber.


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