Deflation revisited Featured

9:57am EDT July 22, 2002

In a special report in February, SBN told you about the threat of deflation and how it could affect your business.

In March, the “D” word popped up again, this time at an economic briefing by Harris Bank.

Sherry Cooper, a former Fed economist now with Nesbitt Burns Economics of Canada, and Don Coxe, a Harris Bank economist, said inflation has become essentially nonexistent during the current economic boom. Prices of durable goods, commodities and computer-related products continue to head downward, which means deflation has arrived.

“There’s too much capacity chasing too few buyers,” Coxe says. “There’s going to be a squeeze on corporate margins this year. Manufacturers are going to feel it.”

But Coxe is quick to point out that deflation isn’t necessarily a bad thing. The kind of deflation that made the Great Depression so depressing only arises if wage rates are sucked into the downward spiral, and Coxe says that isn’t likely to happen.

Driving the decrease in prices are a slew of technological advancements over the past decade that have resulted in lower production costs. That, in turn, has caused a surge in supply — thus pushing down prices for durable goods, commodities and computer-related products, Cooper says.

A new wrinkle in the formula is the involvement of foreign manufacturers, who are mired in their own regional economic woes. These companies are trying to export their way out of trouble, Cooper says. That’s turned the United States into “a port of last resort.”

But both economists agree that the U.S economy is stronger than it’s been in more than 40 years, and should remain that way. Why the prosperity? According to Cooper, it has a lot to do with the end of the Cold War.

“In the late 1990s, there has been a massive transfer of technology from the military to the private sector,” she says. “That’s resulted in widespread use of the Internet, which has really driven this latest surge.”

Coxe is a bit more wary. Although he doesn’t expect the economy to lose ground, he isn’t so confident about the stock market’s recent love for Internet-related companies. Coxe expects economic reality to eventually step in and make those companies accountable for their lack of profits.

“Day players and those who keep buying tech stocks have seen the equity in their accounts grow tremendously,” he explains. “But their focus on the idea that you can grow by hundreds of percent on a regular basis will get blown away soon.”

But that, he says, should only be a minor correction in an otherwise strong economic year.