JPC: The CPI's Future

Volume 25 No. 6

Apr 2008

Economy at a Peak in December 2007?

While the rule of thumb for determining a recession is two consecutive quarters of decline in inflation-adjusted GDP, that behavior is not considered definitive by the economic think-tank that makes the call for the record books. It looks at monthly data, which the GDP are not. Specifically considered are four monthly series:

employment
personal income excluding government transfers, adjusted for inflation
industrial production - manufacturing, mining and utilities
manufacturing and trade sales, both wholesale and retail, adjusted for inflation

Employment peaked in December, while manufacturing and trade sales did so two months earlier; industrial production, two months after December. Personal income has yet to show a discernable peak, having been flat since fall. December, as of now, is the median peak. All these series remain subject to revisions, which is why the official call on the start of a recession takes a while. But when that call comes, we would put our money on December 2007 as the peak - the end of an expansion that began in November 2001.

April 2008 graph

The expansion will not go down as either particularly long or robust, despite the stimulus from remarkably low interest rates and a swing from budget surplus to deficit. Despite the modesty of the expansion, two explosive developments occurred. One, of course, was the boom and subsequent bust in residential housing construction. The boom was spurred by low mortgage rates coupled with lax credit standards and was heralded for its impact on home ownership rates. The rate of homeownership went from 64 percent of households in the mid-1990s to a peak of 69 percent in 2004. But was back down to 67.8 percent by the end of 2007, just about where it was when this expansion began in 2001.

The other remarkable development was the explosion of corporate profits in a low inflation environment. From their trough in the third quarter of 2001 to a peak in the second quarter of 2007, the profits of domestic industries rose at an annual rate of 15.9 percent. The share of profits is most directly measured in the nonfinancial corporate sector. That share rose from 6.2 percent in the fourth quarter of 2001 to 12.9 percent in third quarter of 2006. It was the highest share since the 13.4 percent reached in 1997 during the early stages of the dot-com boom. That share stood at 10.9 percent at the end of 2007.

Taking December 2007 as the jump off point, the outlook is for a slow recovery, perhaps slower than that of the early years of the expansion just ended when employment declined for two years following the trough. However, slow growth and tighter credit conditions may result in an improvement in household balance sheets. The decline in home prices will end and debt will be paid down. Normally a corollary of such behavior - one implying savings rather than consumption - is that inflation is unlikely to accelerate beyond what has already occurred. However, with oil prices resuming their rise and the falling dollar making imports more expensive, that may not happen. Whether it does or not, the Fed will begin to hike rates just as soon as it finds a reason to do so.

FORECAST OF THE CPI-U

 
                                                          CPI-U
                           CPI-U           CPI-U       Food & Energy  
			Index NSAR      Index SAAR      Index SAAR

ACTUAL
2008 - March         213.528  4.0    213.301  4.6    214.176  2.3

FORECAST
2008 June            216.306  3.8    215.158  3.3    215.332  2.1
2008 Sept.           217.244  4.2    217.264  3.7    216.572  2.3
2008 Dec.            217.654  3.6    219.358  3.9    218.026  2.2
2009 March           220.225  3.1    219.991  2.5    218.955  2.2
2009 June            222.418  2.8    221.238  1.7    220.312  2.1



CPI-U: Consumer Price Index, All Urban Consumers, 1982-1984 = 100.
NSAR: Nonseasonally adjusted 12-month percent change.
SAAR: Seasonally adjusted 6-month percent change at an annual rate.

THE CPI'S FUTURE is a publication of JOEL POPKIN AND COMPANY, 1155 15th Street, NW, Suite 614, WASHINGTON, DC 20005, an economic consulting firm specializing in the measurement, analysis and forecasting of wages and prices. The CPI forecasts contained herin are part of its ongoing economic analysis of the U.S. and foreign economies.