Glimmer of Hope Dims

Big disappointment for retailers

Sales had been trying to stabilize recently as the sizable drop in gasoline prices from last year has put extra dollars into the economy, while bargains offered by many retailers have helped to lure reluctant shoppers. But steep job losses in recent months and general insecurities among consumers sent retail sales down in March by a surprising 1.1%, compared to expectations of a small gain. Losses last month were broad-based and come despite tax refunds that are being sent out, with nearly every category except for staple items showing declines.

The US government has passed a huge stimulus plan and the Federal Reserve has flooded the system with massive amounts of liquidity to prop up the faltering economy. Fed Chief Ben Bernanke did say in prepared remarks today that there are "tentative signs" that the sharp decline in economic activity may be slowing. Thus far, however, concrete signs of economic stability remain elusive. Over the past 12 months, sales are down a whopping 10.7%, highlighting the obstacles to a recovery at this time as well as the anxiety that many stores are having to deal with.

Tumbling wholesale prices

An unexpected drop of 1.2% in the Producer Price Index in March - an unchanged reading had generally been expected - more than offset recent gains and is once again raising the specter that the economy may be facing a debilitating bout with deflation. Year-over-year, prices are down 3.5% at the wholesale level, the biggest drop in more than 50 years. Pull out food and energy and prices were unchanged. Year-over-year, however, the core PPI is up 3.8% and has been receding at a much slower pace.

The Fed has cut interest rates to near zero and has been taking unprecedented action to stabilize the economy and preempt a general decline in the price level. This, coupled with massive new spending goals by the government, has prompted some to worry that inflation stands ready to rear its ugly head. In the short term, I believe this is premature.

There is excess capacity in the US and around the world, demand continues to shrink in the world's largest economy, and businesses have been handing out very small raises, assuming you were lucky enough to receive one. Add that businesses have been stuck with unwanted stockpiles and you have just the recipe needed for price stability.

But what about deflation? Prices continue to fall at the early stages of production and the economy has yet to stabilize in the US; however, we are seeing some signs that the huge drop in commodity prices that occurred at the end of last year may have run its course - prices have actually edged off lows (thank signs that China is stabilizing, though the upside is probably limited given the weakness in the world's major economies, but that's a story for another time). Gold prices remain at elevated levels - due in part to worries about the financial system, and gasoline and oil prices have come off their respective bottoms. Plus, the Fed is doing almost everything in its power to flood the system with money and prevent deflation from getting embedded in the economy.