Inflation Rate Up Only 2.7% in 1993; Retail Sales Strong
For the first time since the mid-1980s, the nation’s economy is facing the New Year with the best of both worlds in store--healthy growth with low inflation.
According to government reports released Thursday, consumer prices last year crept up at their slowest pace in seven years, while retail sales in 1993 posted their strongest gain since 1989.
The last time businesses from home builders to car makers had such a promising economic outlook was in 1986, when collapsing oil prices helped keep inflation low while the economy grew at a 3% pace, about the same as now.
The Labor Department reported that the widely watched consumer price index, held down by low energy and tobacco prices, rose only 2.7% in 1993, making the inflation rate over the last three years the lowest since the 1960s.
Meanwhile, the Commerce Department reported that national retail sales--led by home furnishings, autos and other durable goods--rose 6.2% to $2.08 billion in 1993, a further sign that low interest rates have boosted the housing market and purchases of everything from building materials to furniture.
The news was likely to further ease pressure on the Federal Reserve Board to stem inflationary pressures by raising interest rates, economists said. Some analysts argue that raising interest rates could derail economic growth.
The Clinton Administration has maintained that interest rates do not need to be raised because inflation is under control.
Overall, most economists expect that the nation’s gross domestic product will show a healthy increase of about 3% in 1993 when final figures are released later this month.
The economic news is in part a validation of the Administration’s policies, said Gene Sperling, deputy assistant to the President for Economic Policy in Washington.
“Our hope . . . was that if we had a strong but balanced deficit-reduction plan, that was seen as credible by the markets, we could keep interest rates and inflation low, and that would spur the investment side of the economy,” he said. “And that is what is happening: It’s very much an investment-led recovery.”
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Meanwhile, the Labor Department also reported Thursday that the number of new claims for state unemployment insurance benefits fell 1,000 last week to 354,000. The fall was smaller than expected, but economists added that overall job trends have been encouraging.
The national figures on inflation and sales did not make distinctions among regions of the country, though economists believe that recession-racked California continues to lag the rest of the nation in recovery.
But executives here believed the upturn nationally will eventually help pull the Golden State out of recession. Most analysts are predicting a turnaround in the second half of 1994.
“There is a significant spillover to companies situated in the Southern California market,” said George H. Benter, president of City National Bank in Los Angeles. “We don’t see an immediate turnaround for the market here, but they are positive signs for the future.”
Low prices are good news not only for consumers, but for businesses. “When you have low inflation and high growth, it allows manufacturing companies to . . . provide more competitive products to the customer,” said Michael C. Gibson, president of Moorpark-based Kavlico Corp., maker of sensors for automotive, aerospace and industrial markets.
“The more competitive we can be when we’re procuring, the more competitive we can be selling, and that . . . opens more markets. And that ultimately means more jobs,” added Gibson, whose company is making a successful transition from defense contract work to commercial production.
The CPI, which edged up just 0.2% in December on a seasonally adjusted basis, showed the slowest growth in 1993 since a 1.1% increase in 1986. In 1992, the index rose 2.9%, and in 1991 it rose 3.1%, for an average rate of growth over the last three years of 2.9%.
“This three-year period (had) the slowest rate of inflation over an extended period, since . . . the three years ending in 1967, when the annual rate was 2.8%,” said Patrick Jackman, chief economist at the Labor Department’s Bureau of Labor Statistics.
The inflation rate is being held in check by low energy prices, especially for crude oil, which are at their lowest levels in years. Such low prices are likely to persist through much of 1994, particularly if Iraq is allowed to resume shipments of oil onto world markets, Jackman said. Energy prices translate into transportation costs, which are passed on to consumers.
The core inflation rate, which strips out volatile energy and food prices, rose 0.3% in December and 3.2% for the year--the lowest level in 21 years. Food costs were up 2.9% for the year.
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The inflation news meant that the Fed could relax a little. On Thursday, John LaWare, a member of the Fed, reportedly said the central bank’s current monetary policy would be one of “very watchful waiting.”
But “it doesn’t mean the Fed can shut down its radar,” said Robert G. Dederick, chief economist at Northern Trust Co. in Chicago. “The economy has enough strength, and inflation is sufficiently alive, that they have to be concerned that the next step would be a worsening of inflation.” Some analysts expect the Fed to bump short-term rates in the spring.
The government reported that retail sales grew 0.8% in December--to a seasonally adjusted $180.6 billion, 6.9% higher than sales in December, 1992. That was stronger than the expected 0.3% to 0.4%, and marked the ninth straight month of increases.
