The economy that's coming up daffodils

Amazing numbers -- the story of the United States economy so far in 1986: Led by slipsliding energy costs, consumer prices have recorded their biggest back-to-back drops in 36 years. The March consumer price index: minus 0.4 percent, the same as the February rate. Gasoline prices alone were down 12 percent in March.

Interest rates are still falling. The prime interest rate at most banks is now 8.5 percent -- the lowest it's been in eight years. Mortgage rates are edging below 10 percent. Even further drops are possible.

The Dow Jones industrial average is within hailing distance of the 2,000 mark -- up more than 300 points since Jan. 1.

The US dollar is at a postwar low against the Japanese yen.

What does this all mean?

It means, to begin with, that American consumers -- whose increasing indebtedness not long ago was a source of concern to many US economists -- are suddenly in the money.

``It's releasing tremendous purchasing power,'' says Sandra Shaber, consumer economist at Chase Econometrics in Bala-Cynwyd, Pa.

Dr. Shaber points out that wages in the US have increased only slightly in nominal terms since 1985. But with price deflation, consumers have much more money in their pockets after spending on gasoline, home heating, even food and clothing.

Moreover, people who have invested in individual stocks or stock-oriented mutual funds have seen their assets soar. If they cash in, or borrow against their investments, they have more money to spend; even if they let their stocks continue to ride, they undoubtedly feel richer as the market climbs.

And finally, people who have joined the stampede of homeowners who are refinancing their mortgages are enjoying lower monthly payments today than a few months back.

When they refinance the mortgages, they often take some of the equity out of their house. Either way, thousands of homeowners have more money today that can be spent on other things.

``We are three years into the recovery, and instead of an overheating economy driving up interest rates, we have interest rates falling,'' Shaber observes. She says the main reason for this is that prices were stable last year and have been declining this year.

But how long can this go on?

Falling energy prices have been a key reason for falling consumer prices . . . which prompt lower interest rates . . . which cause the stock and bond markets to rise.

If energy prices are the first domino, the chain reaction should persist for several more months. Reason: The Organization of Petroleum Exporting Countries concluded another meeting in Geneva this week without reaching a firm agreement on controlling oil production. That should keep oil prices at their current $12-to-$13-a-barrel range -- or perhaps even propel them lower -- over the next few months.

Not everything is rosy, however. (It never is in economics.) Texas, Louisiana, and Oklahoma are in trouble because of lower oil prices. So are banks that lent to the oil industry and to oil-producing nations such as Mexico.

Still, those stable prices give the Federal Reserve the ability to continue to ignore the growth of the money supply, says Murray Weidenbaum, a former chairman of the White House Council of Economic Advisers,who is now teaching at Washington University in St. Louis.

The economic pieces are falling into place, Dr. Weidenbaum says, to ``make the second half of 1986 better than the first.'' But he doesn't see a real boom in the making. He is concerned about budget deficits and foreign goods eating into US production.

Industrial productivity continues to drag, too. Weidenbaum says this may owe in part to corporate restructuring in the past few years: As people are laid off and factories are closed, businesses incur severance and shutdown costs.

``These are crosscurrents'' in the economy, but for now, at least, the numbers make it a sunny springtime for the economy.

You've read  of  free articles. Subscribe to continue.
QR Code to The economy that's coming up daffodils
Read this article in
QR Code to Subscription page
Start your subscription today