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Three years after the U.S. recession technically ended in June 2009, the economy is still trying to shake off the threat of deflation. The seasonally adjusted consumer price index rose precisely zero in April from March, as falling energy prices made up for rises in other items. With slow growth and job creation, there’s a risk—not a likelihood, but a chance—that the general price level will actually start to fall, as it did for several months at the end of 2008 in the teeth of the financial crisis. Deflation is good for shoppers but it’s terrible for people who owe money because their incomes shrink while their debts don’t. It’s also bad for workers because it’s a sign of economic weakness, pay cuts, and layoffs.
Here are five charts that show the forces at work:
1. Oil prices are falling. Brent crude, the most important benchmark for the world market, is back down to double digits, at around $99 a barrel on June 4. It has tumbled 22 percent since March 1. Traders are betting that an economic slowdown in Europe and China will further reduce global demand for oil, which is used not only for motor fuels but as the raw material for hundreds of petrochemical products. The falling price of gasoline at the pump—from a national average of $3.94 a gallon to $3.58 since early April—may please motorists, but it’s actually a sensitive barometer of market concerns about a slowdown in the U.S. and world economies.
2. Crude isn’t the only raw material that’s losing altitude. The Commodity Research Bureau Spot Market Price Index tracks 22 basic commodities, from hogs and steers to butter, steel scrap, zinc, rubber, sugar, cocoa, and corn. It’s down 7 percent since March 1. Other commodity indexes show similar drops. Cotton futures fell to a 31-month low on signs that the global economy is slowing, Bloomberg News reports. The world’s biggest cotton buyer? China, whose economy is abruptly weakening.
3. The “output gap” is an economics term for the difference between what the economy is able to produce if it’s running at its top manageable speed and what it’s actually producing. A big output gap means lots of underutilized labor and machinery. According to the Congressional Budget Office, the output gap is around 5.5 percent of gross domestic product. Some economists say the gap is smaller than that because some “underutilized” capacity doesn’t really exist (i.e., some unused machines are worn out and some unemployed people aren’t qualified to work). Whatever the percentage is, as long as there is excess capacity, there will be downward pressure on the price of labor and equipment.
4. Treasury bonds are canaries in the inflation coal mine: They lose value when prices rise. So when investors crowd into the market for Treasury bonds that mature in 2022, it means they aren’t worried about inflation picking up for at least the next decade. Yields fall when investors bid up prices. Over the past week the yield on 10-year Treasuries has fallen to around 1.5 percent, which is the lowest in at least the half-century for which the Federal Reserve has kept statistics. The yield was over 3 percent as recently as last July, when investors were more worried about inflation, because they were more optimistic about strong economic growth.
5. With stimulus having become a dirty word in Washington, it seems unlikely that the Obama administration will embark on an aggressive new spending program that might accelerate growth and keep the economy from deflating. Keynesians say that when private demand flags, the government should step in and spend more to put people to work. Instead, government employment is actually falling—a rarity in a period of economic sluggishness. Federal, state, and local employment is down 2.7 percent since the recession ended three years ago, offsetting some of the growth the private sector has managed to squeeze out.
Outright deflation is still unlikely. The Federal Reserve Bank of Atlanta says the bond market puts the probability at around 14 percent in the next five years, based on its analysis of trading in Treasury inflation-protected securities. But the mere fact that it still looms as a distant threat goes to show how weak the three-year-old economic recovery has been.