March 22nd, 2003
"Shock & Awe" Blinding Investors
-- March 21, 2003
The bombing of Baghdad apparently has investors watching CNN's war coverage instead of the latest economic news. If they were paying closer attention to the latest economic reports, they would see that the economy is getting worse, not better. For instance, energy-led price increases are undoubtedly squeezing consumers, and the employment situation is getting worse by the week.
The Consumer Price Index rose 0.6% in February, driven by soaring energy costs. Excluding food and energy, the core rate was up only 0.1%, the smallest 12-month gain since March 1966. This tells us that, although overall inflation is not increasing, rising energy costs are hitting consumers in their pocketbooks. And with consumer confidence at 10-year lows, we won't be surprised if consumers cut back even more to compensate for these higher oil and gas prices. The CPI also shows there's little pricing power for the nation's goods and services. With costs rising dramatically for producers, this puts corporate profits into a colossal squeeze.
As high energy costs, weak profits, limited pricing flexibility, terrible consumer confidence, and uncertain geopolitical events take their toll, it's also no surprise that businesses continue to layoff employees. Initial claims for unemployment were 421,000 last week, marking the fifth straight week above 400,000, which indicates a contracting labor market. The pressures facing US businesses won't be relieved overnight. And even a quick, relatively painless war with Iraq won't provide a one-stop solution.
Once investors clear away the fog of war, they'll realize that the economy's ills weren't a result of the war, nor can they be solved by an end to the war.
related article: Consumer Prices Surge 0.6 Percent