Deflation Is Spreading In Europe – Is America Next? by Gary D. Halbert

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

February 10, 2015

IN THIS ISSUE:

1. January Jobs Report Hailed, But Questions Remain

2. US Consumer Confidence Highest Since 2007

3. Falling Prices: What is Deflation & Why It’s Usually Bad

4. Deflation is a Serious & Growing Threat in Europe

5. Which Countries Are Most at Risk For Deflation

6. WEBINAR: Niemann Capital Management, February 26

Overview

US consumer prices fell in December by the largest amount in six years, reflecting another big monthly decline in gas prices and providing further evidence of falling inflation pressures. The Labor Department said Friday that its Consumer Price Index dropped 0.4% in December, the largest one-month drop since December 2008. It was also the second straight monthly decline in prices with both months reflecting big decreases in gasoline prices.

Consumer prices also fell in the Eurozone in December by 0.2% for the first time in over five years, according to Eurostat, the statistical office of the European Union. Given that consumer prices in the US and Europe went negative in December, we are hearing a lot more talk about deflation – which is a general decrease in prices for goods and services.

A general decline in prices may sound good on paper but when deflation takes hold, it can wreak havoc on the economy. That’s because consumers and businesses have an incentive to delay purchases and investment since prices are expected to fall further. Deflation strangles borrowers because their debts get harder to repay. Just ask Japan.

With the growing concern about the threat of deflation, I am receiving more requests from clients and readers to address it. While I don’t think deflation will take hold in the US anytime soon, it is growing rapidly in parts of Europe, one of our largest trading partners, and elsewhere. So today, we will focus on deflation and the trouble with falling prices.

Before we go there, I would like to discuss two important recent economic reports. The first is last Friday’s unemployment report for January which was widely hailed by the mainstream media. Due to upward revisions for November and December, the report showed that the US economy has generated just over 1 million new jobs in the last three months. But as usual, a deeper dive into the numbers reveals that some problems still persist.

The other recent report we’ll look at is the January Consumer Confidence Index which surged higher than anyone expected. Confidence is now higher than at any time since 2007 before the Great Recession unfolded. Obviously, the plunge in energy prices is the big driver behind the significant increase in confidence since last summer.

January Jobs Report Hailed, But Questions Remain

Forecasters got a pleasant surprise Friday morning as the Bureau of Labor Statistics (BLS) reported the US economy added 257,000 new jobs in January, beating pre-report estimates by about 23,000. The BLS also revised its November and December 2014 new jobs estimates by a total of 147,000 additional jobs created than previously reported.

New job creation over the last 12 months has been the strongest in years. Monthly new jobs averaged 336,000 over the last three months, 291,000 over the last six months and 268,000 over the last 12. Those are the best numbers since 2000. No wonder that the report was so widely hailed.

Europe Deflation

 

The headline unemployment rate rose to 5.7% last month, up from 5.6% in December, but the slight increase was largely due to more people looking for work last month, which is a good thing. Remember that the unemployment rate includes both those who are employed and those actively looking for work.

A broader measure of unemployment that includes workers who have stopped looking for jobs as well as the under-employed moved higher as well, from 11.2% in December to 11.3% in January. The employment- to-population ratio was 59.3% up from 59.2% in December and 58.8% a year ago.

The report offered a tentative sign that US workers are starting to extract higher wages from their employers. Average hourly earnings climbed 0.5% last month – up 12 cents to $24.75 – and 2.2% over the past year. The pickup in wages, if sustained, would start to lift Americans’ living standards after years of income stagnation.

The labor force participation rate which had been mired at a 36-year low improved slightly from 62.7% to 62.9%. I discussed the labor force participation rate at length in my Blog on Thursday and explained how it is not simply people retiring that is causing labor force participation to decline. Many working-age Americans have simply dropped out of the labor force.

While Friday’s report was widely hailed in the media, it still left a lot to be desired. While 257,000 new jobs was above the pre-report consensus, it was still down significantly from levels reached in November and December, as shown above. It will take a lot more than increases of 257,000 to soak up all the workers who were sidelined during the Great Recession.

Consider this: President Obama likes to brag that there have now been 51 months of uninterrupted monthly job gains, which have resulted in 10.3 million new jobs. Sounds impressive, doesn’t it?

Yet over that same period, the working-age population increased by 11.2 million. By that measure, the country has actually lost ground over the past four-plus years. That’s one reason why the labor force participation rate remains near a 36-month low at just 62.9%, which is much lower than the 65.7% rate at the start of the economic recovery.

Gallup CEO Jim Clifton gave a different context for the jobs report, telling Fox “The number of full-time jobs – and that’s what everybody wants – as a percent of the total population, is the lowest it’s ever been… In the recession we lost 13 million jobs. Only 3 million have come back. You don’t see that in [the official unemployment] number.”

Finally, given all the praise Friday’s jobs report got in the media, some analysts worried that Fed policy makers may feel more comfortable starting their long-awaited move to raise short-term interest rates in June or July, a step Wall Street had generally expected to be delayed until September or even later.

US Consumer Confidence Highest Since 2007

In the last week of January, the Conference Board reported that its Consumer Confidence Index rose more than expected last month, jumping to 102.9 from an upwardly revised 93.1 reading in December. The pre-report consensus was for a move up to 95.1, well below the actual number at 102.9.

Europe Deflation

The Commerce Department report noted that consumers had a more positive assessment of current business and labor market conditions, which contributed to the improvement in consumers’ view of the present situation. Consumers also expressed a considerably higher degree of optimism regarding the short-term outlook for the economy and the labor market, as well as their earnings.

The report also noted that consumers’ assessment of present-day conditions was considerably more favorable in January than in December. Those saying business conditions are “good” increased from 24.7% to 28.1%, while those claiming business conditions are “bad” decreased from 18.9% to 16.8%.

Consumers were also much more positive in

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