Business Indicators - June 2005

Business Indicators

by R. Keith Schwer

Not surprisingly, U.S. growth in spring 2005 turned more moderate. Coming after a period of sustained recovery, slower growth suggests the economy is undergoing mid-cycle adjustments. These adjustments come about as the pace of inflation picks up and growth slows, a typical mid-cycle pattern. The numbers, however, do not foretell a downturn – as some pessimists are prone to pronounce – but instead reflect growth at slower future rates. To be sure, there will eventually be another downturn, but to our view, not in the near term.

The rate of inflation, as measured by the consumer price index (CPI), was up 0.8 percent in one month and 3.1 percent above year-ago levels. Excluding food and fuel costs, the core CPI gained 0.6 percent in one month and 2.3 percent for the year. The price of oil has gone above $50 a barrel; and, though supplies are building, world demand continues to grow, leaving little reason to believe prices will soon return to the $30-a-barrel price range of the past. Still, if you adjust oil prices for overall price movements, the current price of $50 per barrel translates to about $15 in 1980 prices. As such, it seems fuel prices at current levels will not derail the normal cyclical expansion, though it will take the edge off the rate of growth.

Double-digit growth in key 2004 Nevada indicators exceeded real U.S. gross domestic product (GDP) growth after adjusting for inflation. Though one month’s data do not foretell trends, we see a slowing in the rate of expansion. Conditions in the Silver State – though tending to follow a different path than the national economy – show slower growth in 2005 than in 2004.

However, this does not signal an economic downturn for Nevada; rather, the state seems to be taking a respite from the rapid growth of 2004 while the national economy makes a mid-cycle adjustment.