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Why Deflation Will Carry the Day for the U.S. Economy
The markets closed up for the day.
The Fed's Beige Book goes by a drab name thanks to the color of its cover. And the news that it delivered today -- that the U.S. economy has slowed since the start of 2008 -- was just as drab. In particular, business owners across the nation told the 12 Fed presidents that their energy and materials costs have been rising, but they have had mixed success in passing higher prices along to customers.
Businesses seem to be caught between the Scylla and Charybdis of rising costs and thriftier consumers. Who would have thunk that the carefree U.S. consumers of yesteryear could begin to pinch pennies? Readers of Elliott Wave International's analysis will know that these results are markers for something bigger than a slowing economy. We call it by its real name here: DEFLATION. Here's how our analysts describe the crux of the matter in the most recent Elliott Wave Financial Forecast:
[Excerpted from the March 2008 issue of The Elliott Wave Financial Forecast.]
The Economy and Deflation
A higher than expected jump in Producer Prices and commodity blow-offs in some markets such as wheat and corn sparked economists’ talk of inflation worries, but a lesser-known and more powerful countervailing force indicates to us that deflation will carry the day. This is the emerging thriftiness discussed here in recent issues. The mentality is coming on so strong that it’s making all the papers. The Christian Science Monitor dubs it “the new prudence.” The New York Times says, “Some believe a fundamental change in behavior and mindset is taking place.” Wednesday’s issue of USA Today quotes a host of different financial writers, trend spotters and business consultants who are noticing a “seminal” change in shared spending patterns. All say that the movement is not just a response to higher prices but a new effort to achieve status by not spending. “For years we had the opposite,” said financial writer Ellie Kay. “It was all about keeping up with the Joneses. Now, the Joneses are starting to cut back.”
It is no coincidence that the big Jones, the Dow Jones, turned down a few months ago. It is generally the index most responsive to turns in social mood. The latest turn toward a more negative social mood is the root cause of the new anti-consumerism. The seeds of an eventual spending strike are everywhere. According to a survey by HSBC Bank, two out of three consumers intend to reduce indulgent spending in 2008, while four out of five plan to increase savings. When asked what they plan to do with the rebate from the U.S. government’s $168 billion stimulus package, 40% of respondents to a Zogby survey said they will “pay down debt.” Another 20% intend to save it. Just 16% said they would spend the rebate on “something they consider necessary.” Shoppers at Walgreens are bypassing brand names for cheaper store brands. According to Wal-Mart, holiday gift card proceeds went to buy food and other necessities instead of extras.
The link between consumers’ emerging caution and a new era of credit deflation is evident in the headline over the Wall Street Journal’s February 8 story: Credit-Card Pinch Leads Consumers To Rein In Spending. America’s love affair with credit cards may be headed for the rocks,” says the Journal, noting “an abrupt slowdown in consumers’ card borrowing.” Another story says that it’s “slap-your-forehead simple”: people need to get out of debt. For many, it’s the only way out. The world is coming around to the message of Conquer the Crash: “If at all possible, remain or become debt-free.” But now people are flocking to pay as much as $169 to hear this simple advice from motivational speakers. The real question is why people are so interested in this advice now. The answer is that it is time for stocks, debt and the economy to deflate.