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Markets & Stocks

The glass is half empty
Friday's job report is a sign that the economy's sugar rush has worn off, leaving only headaches.
July 2, 2004: 2:48 PM EDT
By Mark Gongloff, CNN/Money senior writer

NEW YORK (CNN/Money) - Start worrying.

The economy's strength last year and early this year was just a sugar rush, brought on by deficit spending, tax cuts and super-low interest rates. Now the buzz is wearing off, leaving only a queasy stomach and poor health.

The headline bad news was Friday's report of disappointing job creation in June, and job growth has decelerated each month after a blockbuster number in March. But that's not all the bad news -- not even close.

Despite a few months of strong job growth, wage growth is still pitifully low. In the past year, growth in hourly and weekly wages hasn't even kept up with inflation.

The government's reading on first-quarter gross domestic product (GDP) growth was revised sharply downward. The second quarter's growth will likely be even lower than that, many economists believe, thanks to a slowdown in consumer spending, which fuels more than two-thirds of the economy.

Car and truck sales have tapered off. A short-lived manufacturing boom is losing steam. Higher interest rates will almost certainly mean the end of the strongest housing market in a generation. Economists seem certain there's no housing bubble, but if they're wrong, Katie bar the door -- a plunge in prices would sink the economy.

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The Economic Cycle Research Institute's weekly leading index of economic activity has been in a nosedive lately and tumbled to a 60-week low this week.

The ECRI's leading inflation index, on the other hand, hasn't slowed down yet. Much of inflation's recent oomph has been due to higher food and energy prices, which are volatile and have pulled back recently.

But the worries that have helped drive oil prices higher -- a lack of excess capacity in the world, continuing violence in the Middle East -- haven't vanished. And oil producers are talking about setting the bar for "normal" oil prices higher.

This story first reported that the ECRI weekly leading index had fallen to a 60-month low. Instead, the index is at a 60-week low. We apologize for the error.

Meanwhile, businesses may be starting to expect inflation to take root, which only encourages them to raise their own prices to keep up. As inflation climbs, the Fed will have little choice but to keep raising interest rates, despite the pain in the economy.

Take anemic wage growth, a static unemployment rate, a slower economy and higher inflation and interest rates, shake vigorously, and you have a nasty cocktail called Stagflation.

Another possible alternative is deflation -- an insidious combination of falling wages and prices that can cripple the economy.

Japan is the poster nation for deflation, and its economy followed a very similar path to America's before the onset of deflation in the mid-1990s. Its central bank helped pop an asset-price bubble, just as the Fed did in the United States. A recession and a sharp slowdown in inflation followed, just as it did in the United States.

Acts of terror
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The Japanese economy bounced back briefly, and economists breathed a sigh of relief. But it was still vulnerable, and then it got a few shocks -- an earthquake here, a financial crisis there -- and deflation settled in for a long, unhappy stay. A similar shock here -- a terrorist attack, for example -- could have a similar result.

Anyway, those are the worst-case scenarios. The best-case scenario is that the economy has slowed down to its trend growth rate and will muddle along until the next shock sinks it into recession, or somebody invents a transporter beam or something like that, triggering another economic boom.

In the meantime, higher rates and flat earnings and economic growth will lead to an anemic stock market -- think the 1970s -- where only the hardiest investors can make money picking through the rubble.  Top of page

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