A sustainable expansion

ONE of last month's economic lessons was that too much good news can be bad news. The Federal Reserve, concerned that the economy was expanding too fast, that the labor market was too tight, and that inflation was a more serious threat than recession, raised the discount rate in an effort to cool things down. One of this month's lessons would be that bad news can be good news. United States government figures for August show an economy that has slowed, and perhaps stalled. Leading indicators took a dip, and joblessness was up slightly. Industrial production figures, due out tomorrow, may not even be positive.

But this stall is not necessarily a bad thing. It may indicate an economy cooling down to a sustainable rate of growth, rather than overheating in a way that might precipitate a recession.

The cooling cannot be ascribed to last month's increase, though, but rather to earlier tightening actions the Fed has been taking since March. The cooling does, however, remove whatever pressure the Fed may have felt to raise the discount rate again before the election.

US exports, adjusted for inflation, are up a dramatic 20 percent over the past 12 months. That would be a rate hard to maintain. Presumably last month American goods started piling up in foreign warehouses; customers abroad have started to say ``Enough!'' We might see some downward pressure on the dollar in months ahead if this inventory isn't reduced fairly soon.

On the inflation front, the 0.6 percent August increase in producer prices needs to be explained away somewhat: Food and energy increases accounted for half that, as a result of the drought and gas-pump price hikes brought on by high summertime demand. But oil prices are falling, and we shouldn't see much more effect from the drought (except for a blip in fruit prices) until next year, when meat prices are expected to rise.