Economic Tea Leaves (Not Tea Bags)

The Federal Reserve released a regional report showing some slight upticks in the economy in some regions and some sectors. Essentially they showed the economy falling at a slower rate. But they were alone among the spate of economic news over the past 48 hours.

Foreclosures went up 24% in March to its highest monthly total on record. Unemployment claims declined this week but are still at a very high level. And most startling, consumer prices fell for the first time since 1955 at the same time that local sales tax revenue fell dramatically. This is pretty common economics 101 - less demand, lower prices. But it risks a serious deflationary trap, despite the macroeconomic moves to print more money, which is typically inflationary. We are the opposite of a Weimar Republic right now.

The Labor Department said its closely watched Consumer Price Index fell 0.1 percent, after increasing 0.4 percent in February. Analysts polled by Reuters had forecast headline CPI rising 0.1 percent.

Core prices, which exclude food and energy items, rose 0.2 percent after rising by the same margin in February. That compared to analysts' prediction for a 0.1 percent increase. Core prices have risen by 0.2 percent for three months in a row. March core prices were lifted by increased costs for tobacco and vehicles.

On a year-over-year basis, consumer prices fell 0.4 percent in March, the first 12-month decline since August 1955, following a 0.2 percent increase the previous month. Core prices rose 1.8 percent year over year.

Since the entire world has built their export surplus on the banks of the American consumer, this severe drop in consumer spending has serious consequences for the world.

The facts are pretty straightforward. National economies rev up – or not – based on what business spends (known as investment), what households buy (consumption) and what is bought or sold between a country and the rest of the world.

The American household was the rock in all this [...]

Hence the delicately put, but nevertheless piercing, view from the European Central Bank, which would like to see a United States upturn as much as anyone in the world: “While households have been a powerful force in dampening the downturn in past recessions, the same may not be true in the current episode,” the central bank bulletin says.

It's not going to be the same, and the world will have to find new markets to make up for Americans living within their means, or live with lower growth. Of course, in the midst of this downturn, it could delay the bounce back for a long time.