Watching the Indicators

More signs that the recession may be ending: The index of U.S. leading economic indicators rose 1.2 percent in May, following a 1.1 percent gain in April. A Bloomberg News survey of economists had forecast the increase at 1 percent, which means the economy is now stronger than even the most seasoned watchers expected.

That 1.2 percent increase was the biggest gain since March 2004. Put together, the past two months have shown the biggest two-month rise in the indicators since 2001.

And what are those leading indicators? There are ten in all. Seven of them increased in May:

* Real money supply
* Building permits
* Interest rate spread
* Consumer expectations
* Stock prices
* Vendors' deliveries of supplies to companies
* Manufacturers' new orders for nondefense capital goods

Three of them declined in May:

* Claims for jobless aid
* Average weekly manufacturing hours
* Manufacturers' orders for consumer goods

So now you know.

The Other Side of Inflation

Wednesday's release of the Consumer Price Index, as I expected, didn't show any signs of mounting inflation. The monthly rise in consumer prices came in at 0.1 percent in May, after staying flat in April. That's about as close to static prices as you'll ever see.

In fact, looking at the year-to-year figures, the Consumer Price Index has fallen by 1.3 percent over the past twelve months. That's the largest decline in nearly 60 years. So rather than inflation, should we be living in fear of deflation?

In many ways, deflation is a bigger problem than inflation. Inflation tends to be an indication of the economy overheating, and causes terrible erosion in our purchasing power. But deflation is a sign of the economy contracting. Deflation causes businesses to get less for the products they sell, meaning they are able to pay fewer workers less money, meaning the economy can't get moving again. In many environments, inflation is the bigger problem. In an economic slowdown, deflation would probably be more hurtful.

Are we headed for deflation? As I said, the latest numbers show prices static rather than dropping. The Fed seems to agree. "The recent data on inflation shows that the risks of deflation, which entered the minds of many central banks around the world over the last 18 months," said Fed governor Kevin Warsh on Tuesday, "the risks seem to be significantly attenuated."

The Specter of Inflation

As if we don't have enough trouble to worry about these days, some financial pundits have raised the idea that we are due for a bout of rampant, Seventies-style inflation. The fear arises out of the fact that the government's heavy deficit spending, which the Obama administration felt necessary to pursue with its stimulus package, could end up devaluing the dollar by pumping so many more of them into the economy.

But recent figures show no such thing happening. In fact, on Tuesday, the Producer Price Index - the government's way of tracking wholesale prices - showed a jump of just 0.2 percent in May. So for now, economists don't see inflation looming in the near term. Today the government releases the Consumer Price Index, the measure of how much you and I pay for groceries and gasoline. Even though oil prices have been rising, food prices have been slipping a bit, so this measure probably won't show much threat of inflation either.

The real problem with inflation will come, if it does, when the economy snaps back to life. If the government is still pouring lots of deficit-spending dollars into the economy at that point, there's a chance that the economy could overheat and we might enter an inflationary period. But by definition, that would mean the recession had ended - and by that point, a little inflation might not look so bad.

Even the Mattress

We know this economic crisis has been harsh, but we thought the old trick of stuffing your money in your mattress was at least still safe. Not so. Even the mattress is suspect now.

An elderly woman in Israel had apparently been stuffing her mattress with money for years. She had put her whole life savings in there, a sum worth more than $1 million. The mattress had gotten so old, and presumably so lumpy, that the woman's daughter bought her a new one as a surprise.

Unaware of what was filling the old mattress, the woman's daughter threw it in the trash, and the garbagemen took it to the dump. The next thing you know, the two women are rummaging through three different landfill sites, frantically tearing through beat-up mattresses. They still haven't found the money.

I sincerely hope you aren't stuffing your savings in your mattress. Even in the current environment, I think we can find better places for it than your bedding.

Time to Pop the Corks?

We reached a milestone on Friday, when the Dow Jones Industrial Average climbed back to the point at which it started 2009, meaning all the losses of this spring have been erased. The Dow began the year at 8,776, but bottomed out on March 9 at 6,457. That was the index's lowest point in 12 years. In the three months since then, the Dow has gained 34 percent, finishing last week at 8,799.

That 34 percent gain has come over 68 trading days. We haven't seen the Dow rise that much in that short of a time since November 1982. At that point, we were coming out of the 1981-82 recession, an economic downturn that was in some ways even worse than what we've been seeing for the past 18 months. That runup in the Dow kicked off the bull market of the 1980s, which lasted for almost five years.

Now, no one is saying that we're destined for a rerun of the go-go Eighties. For one thing, the Dow recently got an artificial boost by dropping General Motors and Citigroup and replacing them with Cisco and Travelers. If GM were still part of the Dow, we wouldn't have reached those 2008 levels yet. And of course, the unemployment figures continue to be distressing. But we can take solace in the fact that the end of the recession is unfolding just as we expected, with the markets returning first, to be followed - at some point - by the jobs numbers and the housing market.

One Step Up, One Step Back

We've seen some stirrings of good news in the American economy lately, but that doesn't mean that all is rosy. The housing market, which is expected to be the last thing to actually recover when the economy comes back, suffered a setback in figures released this week: U.S. mortgage applications have fallen to their lowest level since last February.

The reason given: Rates on fixed mortgages also jumped to their highest level this year. Those mortgage rates increased because of some of the other improving signs of the economy. But the rising rates, in some ways good news, also made homebuyers more reluctant to buy, stalling out the recovery in the housing market.

All this is a further indication of how difficult it's going to be to get us fully extricated from this mess. Good news in one area can result in problems in another sector of the economy. Expect to see the recovery continue in fits and starts until we are finally back on our feet.

Card Games

Here's another little story about how banks have lost their way: We've all had the experience of being deluged with credit card applications, as issuers tried to get consumers to roll up as many cards as possible. The indiscriminate nature of these mailings eventually got to a man in California named Gary More. He took one application from Chase and wrote across it "Never Waste a Tree," then sent it back in the prepaid envelope.

A couple of weeks later, Mr. More got his brand new Chase Visa - issued to "Never Waste Tree." He cut it up.