Global Economy Due for a Rebound

The weak pace of global economic growth is one of the most important factors contributing to the mild inflation in consumer goods prices during the past couple of years.

Since export-driven economies depend to a great extent on sales to the United States, companies in Europe and Asia try hard to keep exports into the U.S. market growing. This often has meant dropping prices, leaving U.S. producers of similar goods little choice but to respond in kind. In fact, the "core" producer price inflation rate, which measures quotes for prices of goods produced by U.S. manufacturers, declined over the course of 2002 for the first time in the 28-year history of the data. The principal beneficiaries have been U.S. consumers.

However, conditions should become somewhat more favorable to producers, and somewhat less favorable to consumers, by the end of 2003. Excess capacity worldwide is showing signs of dissipating for an increasing number of industry sectors. Capacity utilization rates in the U.S. show signs of having bottomed out during the closing months of 2002, while the U.S. dollar has weakened considerably during the past four months. During 2003, all of this should lift global economic activity to a level at least marginally above the 2001-2002 cyclical floor, and should make bargains for U.S. consumers at least a little harder to come by this year.