Inflation stabilizes
The consumer price index rose 0.3 percent in February after gaining 0.6 percent in January. Energy prices, which had spurted 3.9 percent in January, decreased 0.2 percent in February as fuel oil and electricity prices declined during the month. In contrast, food prices accelerated, rising 0.5 percent in February after posting only a 0.2 percent hike last month. Since the overall CPI did rise less than the previous month, the index posted a 3.5 percent gain from a year ago. As depicted in the chart below, this is a slight improvement from last month. Notice the rapid run-up in the CPI over the past two years! But the index does appear to be stabilizing around current levels.

Excluding food and energy prices, the CPI gained 0.3 percent as well, matching the increase of the previous month. Apparel prices jumped 0.8 percent and tobacco prices increased 1 percent. Otherwise, price gains were generally modest across the various sectors, and in many cases actually showed a slower rate of increase. Apparel prices have generally declined over the past several years, but about twice a year, the category jumps. This is generally viewed as the introduction of either the spring line (or the winter line in the fall). In any case, apparel prices are still down from a year ago. Tobacco prices are another story altogether. The trend here is towards accelerating prices. From time to time, tobacco prices will decline, but the trend is generally higher. Tobacco prices are up 6.7 percent from a year ago.

The chart above depicts the year-over-year rise in the goods and services components of the CPI. Prices of goods have been coming down in the past year, but keep in mind that a good chunk of this is related to oil prices. Slower gains in the commodities component also reflect high tech industries where prices are generally coming down: computers, VCRs, and DVD players for instance. Prices of services reached a low point at the end of 1999 and have since accelerated. To some extent, higher electricity prices play a role in the higher costs of services. To a large extent, though, higher prices of services are generally associated with higher compensation costs. If prices of commodities were accelerating at the same time as prices of services, we would be in for some inflationary pressures in the next few months. This could indeed become a limiting factor for further Federal Reserve easing. However, it does appear that commodity prices have come down - and this trend could continue for several months - to offset gains in services.

International trade deficit level
The international trade deficit on goods and services remained virtually unchanged in January at $33.3 billion. Notice how the trade deficit has remained at roughly the same level over the past five months. Depending on whether you look at the glass as half full or half empty this could be favorable news.

Both imports and exports inched up modestly in January after declining the past several months. Despite the slight gain, import growth is still moderating from year ago levels. Export growth was also heading lower, although it appeared to turn around in January. On the import side, oil prices have played a major role in the upswing as well as downswing in growth. Imports of capital and consumer goods have moderated in the past few months, although they were still rising through much of 2000. Generally, imports of capital goods are not viewed as negative for the U.S. economy since they help to expand our productive capacity. Imports of consumer goods are viewed in a less favorable light because foreign-produced goods don't add to GDP growth, nor do they support U.S. workers. It is worth noting, however, than even consumer goods imports serve a healthy function in our economy by keeping prices competitive and holding down inflationary pressures.

Export growth helps to fuel industrial production in the U.S. Notice that export demand weakened in the second half of 2000, roughly the same time that domestic production began to soften. Should export growth remain soggy, U.S. industrial production will have to rely on higher domestic orders of manufactured goods.

The bilateral trade balances with various trading partners generally are showing a worse picture for the United States from a year ago. For instance, the trade deficit with both Canada and Mexico is wider this year than it was a year ago at this time. The same holds true for Western Europe and the Pacific Rim countries. Ironically, Japan's trade deficit with the U.S. narrowed marginally in January 2001 from November and December 2000. Instead, our deficit with China is widening.

The January trade deficit is exactly in line with the average for the fourth quarter of 2000, indicating that the trade sector may not necessarily act as a drag on GDP growth.

Federal budget balance improves for the year
The U.S. Treasury announced a budget deficit of $48.2 billion in February. This was larger than the budget deficit for the same month for the past seven years! That is unusual in light of the improvement in the federal budget situation. In any case, the year-to-date budget surplus amounts to $25.9 billion despite the February deficit. Last year at this time, the budget surplus amounted to $0.2 billion.

For the year-to-date period, individual income tax receipts are up 8.4 percent from a year ago, while corporate tax receipts are up 6.1 percent over this period. It will be interesting to see if this growth rate diminishes over the year as consumers find capital losses rather than capital gains on stocks. In addition, if employees are working fewer hours - or the unemployment rate increases as the economy softens - we may also see slower growth in individual tax receipts.

Total outlays are up 3.2 percent from a year ago as Medicare (6.1 percent) and social security payments (6.4 percent) are the largest contributing factors. Net interest payments (interest on the old debt) is down 3.9 percent from a year ago as the U.S. government benefits from lower interest rates as well as slower growth in the total debt burden.

President Bush's tax cut plan is based on the projection that the U.S. budget surplus, which has increased rapidly thus far, will continue to increase over the next 10 years. If economic activity really does take a dive, the surplus will become smaller, not larger! Also, the government isn't likely to benefit much from capital gains taxes in the next couple of years. If the budget surplus does not come in line with expectations, it will have implications for the Treasury securities market. Thus far, the Treasury has announced plans to reduce the supply of new Treasury securities because of the projected surplus. This could change the supply situation going forward.