Look Both Ways: In with a Roar?

Tame CPI levels have kept companies wary of a squeeze in margins, but consumer confidence is high. Will consumer spending follow?


Last year “came in like a lion and went out like a lamb,” while 2005 may do the opposite, suggests Conference Board economist Ken Goldstein.

“We’ll probably wind up with what will feel like sluggish [GDP] growth, 3 percent to 3.5 percent,” said Goldstein in a year-end interview with CFO.com. But if consumer spending kicks in or productivity increases dramatically, he added, growth could rise as high as 4 percent to 4.5 percent.

Goldstein recalled getting burned a year ago by his prediction that 2004 “could be the best economic year in the last 20.” Sure enough, last year “opened like gangbusters,” driven by strong showings in the car and home markets as well as rising profitability.

Many U.S. companies, however, wouldn’t commit much of the resultant “pile of cash” to capital improvements or new hires, noted Goldstein. By spring, businesses had fallen back to the “caution they had in the first half of 2003” regarding the costs of materials and labor — and particularly energy — and the resulting “potential for a squeeze” in margins, barring a surge in consumer prices.

Indeed, tame levels for the Consumer Price Index, however much they may have reassured consumers, have only stoked fears of a “squeeze.” The result has been a “tug of war between the bond and stock markets” as investors seeking safe haven have actually lowered Treasury yields during an extended period of tightening by the Federal Reserve.

The yield on the 10-year bond, which stood at 4.7 percent to 4.8 percent last spring, hovered around 4.2 percent to 4.3 percent at the end of 2004, despite an ever-increasing deficit-driven supply of the paper. Goldstein noted that by parking cash in inflation-sensitive instrument, Treasury investors are betting against a CPI upswing. They’re also betting against a continuation of the policy that saw the federal funds rate climb 25 basis points every six weeks beginning June 30 — climbing 1.25 percentage points to its current 2.25 percent.

Later this week, Friday morning’s report on non-farm payrolls is expected to show an increase of 175,000 jobs in December, compared with 112,000 a month earlier, according to a consensus forecast on Briefing.com.

According to Goldstein, however, a more eagerly awaited number — at least on the part of bondholders — will be the January 19 announcement of the CPI for December. A month earlier, while the producer price index (PPI) climbed 0.5 percent, November’s CPI rose just 0.2 percent.

On December 28 the Conference Board reported that its own index of consumer confidence jumped to 102.3 in December from 92.6 in November, reaching the highest level since July, according to The New York Times. All well and good, but increased spending by consumers — as evidenced in the CPI — would be even more welcome news to many finance chiefs.

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