Growth Slowdown Ought To Be Temporary

Popular Economics Weekly

We may be in for a bout of disinflation, according to economist David Rosenberg, chief economist and strategist at Toronto-based investment manager Gluskin Sheff + Associates Inc. But this is normal during recoveries, as some economies have grown too fast, while ours is still hobbled by too much debt and no consensus on how to create more jobs. “All the economic data is starting to roll over,” Rosenberg said in a Bloomberg Marketwatch interview. “We are positioned for the type of disinflationary slowdown that we’re going to be seeing over the next 12 months.”

What does he mean? (Disinflation isn’t deflation, since prices are still rising but at a slower rate.) There is a worldwide slowdown of growth in both the emerging countries and Europe, as their governments raise interest rates to either combat ballooning deficits or inflation. China’s economy is in fact overheating, while the Japanese and Australian economies had negative growth in the first quarter. And the euro’s problems are scaring the EU and Britain, where governments are also instituting austerity measures to slow spending and investment.

The official U.S. unemployment rate increased to 9.1 percent in May from 9.0 percent in April. This is the highest unemployment rate since December. Economists blamed the slowdown on higher gasoline prices and a slowdown in manufacturing caused by lack of parts from earthquake-wracked Japan.

But there is more to it than higher commodity prices and natural disasters. Another reason for the slowdown is that consumers continue to pay off debts—including mortgage debt—accumulated during the bubble years, rather than borrow. And that means less disposable income is available to spend.

So where is inflation these days? Overall inflation is falling (hence the disinflation) and that is harmful to economic growth. I.e., disinflation means companies can’t raise prices above the inflation level—which is basically the cost of doing business—so they cannot expand and hire more workers. We can see from a recent Paul Krugman Blog piece taken from the St. Louis Fed that both the retail CPI core and headline inflation numbers are still trending downward.

This means consumers have to spend more to reverse the disinflation, while companies and banks have to invest more of their some $3 trillion cash hoard. But neither will do so as long as the jobs picture remains dismal, and wages are depressed. For the record, demand theory tells us that it doesn’t matter who provides the jobs. Roosevelt’s New Deal Administration knew this when they employed so many in the WPA and CCC (Civilian Conservation Corps) work programs that built much of our modern infrastructure and National Parks.

We haven’t learned that lesson, as congressional conservatives and liberals battle over debt ceilings, instead of focusing on the ultimate solution to our debt problems—policies that create more jobs.

Harlan Green © 2011