Even though jobs disappeared for a second straight month, the rise in hourly wage rates was still 3.7 percent higher in February than a year earlier. The slow economy, therefore, is not slowing the primary source of inflationary pressure. Slow growth causes problems. An uptick in inflation causes problems. The combination is about as bad as economic conditions get. And the combination is evident, though to different degrees, on both sides of the Atlantic.
Slow growth and rising costs threaten to squeeze profit margins. In addition to problems in credit markets, poor profit prospects are driving selloffs in stock markets. Finally, little of this is likely to change in the second quarter, even with lower domestic interest rates. Some hope the stimulus package, with checks arriving some time in the middle of the second quarter, will set the stage for better economic conditions. That won't happen if that money is left in the bank by consumers too nervous to spend it. And two straight monthly declines in jobs do nothing to calm jittery consumers.
Trade remains the one bright spot in the U.S. economy. Job losses, falling confidence, and soft retail spending represent the weak spots. The only question is how weak and for how long. It might not get much weaker, but it could take all year or longer to see sustained significant improvement. Without that improvement, and/or price relief, squeezed margins suggest stock prices will remain under unrelenting pressure and not just domestically. Indeed, falling stock prices, rising retail prices, and pressures on margins could result in less overall global economic growth. The world's economy grew by nearly 5 percent in 2007, will struggle to grow by 4 percent this year, and growth prospects could be trimmed even more than that by these pressures through the end of the year. In short, 2008 got off to a bad start. It isn't going to get better any time soon.
