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GOOD NEWS ON THE ECONOMY, REALLY GOOD NEWS ON INFLATION

 GOOD NEWS ON THE ECONOMY, REALLY GOOD NEWS ON INFLATION
 NEW YORK, April 20 /PRNewswire/ -- The following was issued today by


Eugene J. Sherman, senior vice president and chief economist, Federal Home Loan Bank of New York:
 In the latest week there was good news and really good news. First, the really good news. A major fork in the inflation road was approached, and the route chosen was that of lower inflation. Specifically, the abrupt end of the five-month strike by the United Auto Workers against Caterpillar Inc. was a clear victory for management and defeat for the union. This event appears to be an acceleration of a well-established trend toward declining union strength. Union membership as a percentage of employed wage and salary workers has been declining since 1953, when it peaked at over 25. It presently is at around 16 percent. The actual number of unionized workers has been declining since 1979, when it peaked at almost 21 million; it is presently at around 16 million workers.
 Along with declines in membership, unions seem to have been losing strikes at an accelerating pace. In 1980, New York City took a transit strike and the Transport Workers Union lost disastrously. In 1981 the air traffic controllers struck and were replaced. More recently, Eastern Airlines, Greyhound, International Paper and Phelps Dodge beat the unions with replacement workers. The point is that compensation increases have been held in check by ebbing union strength. The Caterpillar outcome was just one more in a trend, but a very big one -- large company, good business prospects and a major exporter, against a very big, powerful and wealthy union. Indeed, it may have accelerated the trend. The major implication is that compensation increases will continue to abate.
 Labor costs are the stickiest component of inflation forces. If they continue to moderate while productivity rises, albeit slowly, then the outlook for diminished inflation over the long run is very much improved. Inflation can be compared to Dracula: it is at first seductive, but over time drains the life blood out of the body, and is never dead. In the latest week, inflation had a cross thrust at it, and went into retreat. That's the really good news.
 The merely "good" news was on the economy. Housing starts rose sharply again, the fourth consecutive monthly increase. Exports surged to a new monthly record while imports edged a little lower, confirming our view that American goods are highly competitive abroad and at home, an important force for recovery. Industrial production rose for the second consecutive month. Retail sales eased a bit after two very strong months, essentially holding on to a new, higher plateau of sales. And the inventory/sales ratio declined to very low levels in February owing to strong sales and unchanged inventory levels. As a result, continuing sales should lead directly to new production.
 While renewed economic expansion is on course, the moderate pace will constantly call into question its sustainability. Slow money supply growth, as at present, will be a concern to the Federal Reserve. The Fed seems to have a predisposition to lower short term rates, as demonstrated a week ago, provided easing actions don't "spook" the market over renewed inflation (reawakening Dracula). If the recovery slows and money supply underperforms targets, bullish behavior in intermediate and long bond prices could embolden the Fed to another round of easing. Overall, we continue to anticipate lower intermediate and long term interest rates.
 -0- 4/20/92
 /CONTACT: Eugene J. Sherman, senior vice president and chief economist of Federal Home Loan Bank of New York, 212-912-4605/ CO: Federal Home Loan Bank of New York ST: New York IN: FIN SU: ECO


GK-KD -- NYFNS1 -- 9821 04/20/92 07:30 EDT
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Publication:PR Newswire
Date:Apr 20, 1992
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