“Eyes turn to the danger of deflation”
This is the LA Times headline of July 26, 2010-what does it mean to us, really?
Are prices going down, or up? For many small to mid-size manufacturers, material prices are going up and they are on allocation-they can’t get enough materials to produce what their customers are ordering. That sounds like a classic case for price increases, and sure enough, their prices are going up. They should also be hiring employees to turn out the work. Instead, with so much uncertainty about the future, businesses are working overtime and/or hiring temporary workers. They are afraid to put on full time staff. They are investing in productivity tools, especially in technology that allows fewer people to produce more products.
If employees’ jobs are uncertain, they are not going to invest in a new car or even new clothes for school. Consumers are keeping their spending low. That continues the pressure towards deflation. If many people are unemployed, companies can replace their workers with employees who will work for less. This is not happening across the board, but if you have noticed, there are a lot of young college graduates without jobs. They are taking paid internships at minimum wage, they are taking unpaid internships, they are free-lancing, or they work 2 or 3 part time jobs. This means the next year of college graduates will be competing against these young folks for the minimum wage jobs companies are offering. These consumers have no money to spend, and end up living at home. Good thing the new health plan says they can stay on their parents plans until 26 years of age.
So maybe, we do have deflation to fear. As individuals, we can support the economy by spending now on replacement purchases, and maintenance. Maybe you need your house repainted or a new roof. If you can afford to do it, now might be the time. Lots of contractors are looking for work. If you have extra work, hire someone to help. There are a lot of good people out there who need jobs.