This week, several crucial economic indicators from the previous month were released. First, figures on industrial production and the producer price index came out on Wednesday, followed by the consumer price index on Thursday. Let’s delve into the specifics…
The Federal Reserve reported that manufacturing rose by 0.9 percent in December, marking its most significant increase since December 2010. While manufacturing remains approximately 8 percent below its peak in July 2007, it has bounced back nearly 15 percent from its low during the recession. In contrast, industrial output is now just under 5 percent below its pre-recession high from September 2007, showing over a 14 percent increase since the recession’s lowest point in June 2009.
It’s been a challenging journey to reach this near-stable point. Whether industrial production will continue on this upward trajectory remains uncertain. There are concerns that this might be merely an illusory recovery before economic conditions decline once again. Only time will reveal the truth.
Meanwhile, production costs experienced both increases and decreases in December. The latest producer price index (PPI), released by the Bureau of Labor Statistics, showed a decline of 0.1 percent, driven down by lower food and energy prices. However, the core PPI, which excludes these categories, saw a jump of 0.3 percent.
Similarly, price inflation, as indicated by the consumer price index, seems to benefit from falling energy and food prices. The Labor Department announced that consumer prices remained unchanged last month. It’s evident that an uptick in energy and food prices will likely lead to significant rises in both overall prices and production costs.
To put it bluntly, these moderate price increases are unlikely to persist…
Juicing Up the Economy
Jim Rogers, a well-known speculator, suggests that the U.S. government will overspend and that the Federal Reserve will resort to printing money to stimulate the economy in preparation for the upcoming election year.
“You need to keep two things in mind—there’s an election in America in November, which means we’re bound to see a wave of positive news. Moreover, the American government is currently spending astonishing amounts of money, printing more of it, all in a bid to secure an electoral win,” Rogers remarked to The Economic Times, a prominent Indian newspaper.
“This cycle repeats every four years; they strive to boost the economy so they can emerge victorious in the elections.”
Indeed, the Obama administration and Fed Chairman Bernanke have been actively stimulating the economy for some time. They’ve employed various tactics to enhance economic performance over the past three years, including trillion-dollar deficits and keeping the federal funds rate close to zero, in addition to implementing two rounds of quantitative easing.
For the most part, the repercussions of their extensive interventions have remained concealed. The economy has struggled, exhibiting sluggish growth, while price inflation has been manageable, but signs suggest this may be changing.
Heating the Stove with Furniture
Assuming the European debt crisis doesn’t further infect the U.S. financial system, consumer spending could reignite inflationary pressures. We have covered this topic extensively in our recent issues of Economic Prism.
In brief, consumers are accumulating debt at a pace not seen in a decade. This behavior effectively serves as the conduit for the $2 trillion injected into the economy by Bernanke’s policies. As this money circulates, it becomes increasingly difficult for the Fed to control its flow and velocity.
The Fed has already issued an excess of money. Should it choose to print even more, as Rogers predicts, this could result in an explosive inflation scenario. However, before such an explosion occurs, the economy might appear to be enjoying a genuine boom. Initially, this would feel beneficial, but it would carry serious future consequences.
The current phase that feels promising is marked by low inflation, improved business activities, and increased lending by banks. However, one should not be misled into thinking that this upswing is a long-term solution; the optimistic boost to the economy will likely be short-lived. Here’s the core message…
“Sometimes, circumstances may compel a man to heat his stove with his furniture,” explained Austrian economist Ludwig von Mises in his book, *Human Action*. “But if he does, he must acknowledge the long-term consequences. He should not deceive himself into thinking he has stumbled upon a marvelous new way to heat his home.”
Sincerely,
MN Gordon
for Economic Prism
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