Comment on inflation, US borrowing, metals
Many brokerages, banks, and economic-research firms publish periodic newsletters on economic trends. As a service to readers, and without endorsing any particular views, the Monitor presents excerpts from some of these newsletters.
The decline in the rate of wage inflation is likely to persist throughout this year. The cost of escalator clauses will be less, and unemployment will hold down the wage increases of unorganized workers. On the other hand, the general pattern of collective bargaining settlements shows a much smaller improvement than wages as a whole. In the final quarter of last year, for example, the government reports that the full three-year cost of large settlements was still 6 percent a year. Approximately two-thirds of last year's improvement was due to the reduction in the cost of escalators. Hard as it is to believe, expensive wage contracts are still being signed in the industries that are not in a disaster state.
- Data Resources Inc., Lexington, Mass.
The volume of Treasury financing has been relatively moderate lately. Unfortunately, it is but an interlude - the calm before the storm. Indeed, the second half of March will resemble the latter half of December 1982 when, in a period of a bit longer than a week, the Treasury auctioned $11.6 billion of three-month and six-month bills, $7 billion each of one-year bills and two-year notes, $5 billion of four-year notes, $41/2 billion of seven-year notes, and $3 billion of 20-year bonds. The difference between the two months will be that in the second half of March all the financings will be larger than they were in December.
- Griggs & Santow Inc., New York
The recent break in precious metals prices may be an isolated situation. But then again, it may not be. Over the past couple of weeks, the entire commodity market has weakened measurably. . . . It could foreshadow the coming of a full-scale deflation. Besides the impact of deflation on corporate profits, we think the precious metals break is noteworthy as a timely reminder that prices that are not supported by true value can and do collapse suddenly.
Gold, for instance, started skyrocketing last June, soaring from $300 to $480 (an ounce) in only about three months. After considerable backing and filling, it then moved up again, reaching $510 by mid-February, or less than 10 percent above the first peak. Then in less than two weeks, the New York spot price plunged back to $400. Chances are, after a short technical rally, a resumed decline will bring the quotation back where it started last June.
- T. J. Holt & Co. Inc., Westport, Conn.
One could make the case that falling oil prices could be the first real pervasive break in inflation psychology. As in 1975, when inflation psychology, fueled by the sharp rise in oil prices, led to an economic recovery greater than projected, a break in inflationary psychology could moderate the initial phase of the recovery as corporations and individuals delay buying, waiting for the ripple effect of falling energy prices to work into prices for other goods. Clearly, the need to rebuild inventory now before prices go up has lessened. The break in inflation psychology and the possibility of lower near-term demand could lead to surprisingly low inflation and, ultimately, interest rates. The possible delay in demand, combined with negative trade balances, could produce near-term, minor disappointment in corporate earnings and certain manufacturing sectors of the economy. It is likely, though, that such shortfalls would be offset by higher multiples as interest rates rachet down. This provides generally positive longer-term expectations.
- Paine Webber Mitchell Hutchins Inc., New York
Any new debt that flows into third world countries must be channeled into industries where real competitive advantage can be gained. These advantages need not be absolute versus all competitors in all cases. They must, however, be absolute compared with some competitors in some cases. Any investments in third world countries that do nothing to change the basic competitive position of the country will in the end have to be rescheduled.
The same is true for a corporation's business portfolio. Any debt or retained earnings that fund a business without real competitive advantage will in the end be money thrown down the drain.
- The Boston Consulting Group, Boston