U.S.

A Grinch-Like Economy?

By CBSNews.com staff CBSNews.com staff

December 2, 2000 / 7:59 PM EST / CBS

As the owner of a Yonkers auto dealership, Dwight McGuirk sees firsthand evidence that the economic boom the U.S. enjoyed through most of the year may be coming to an end, CBS News Correspondent Randall Pinkston reports.

He saw his first signs in the "beginning of October," McGuirk said. "Probably a little bit in September, but the whole month of October was quiet."

November sales were also down for America's big three car makers. Ford was down 7.2 percent; Chrysler, 5.5 percent; and GM, 8 percent.

What is inflation?

Inflation is a rise in the general price level—in other words, the price of all goods and services.

The government measures inflation with the Consumer Price Index, which is a measure of the cost of a basket of goods that an average American might buy.

The causes of inflation are often mysterious.

Sometimes prices of goods go up because of higher demand and wages follow; other times, wages go up first and business owners raise prices to cover the higher wages.

Inflation can have wide-ranging effects.

First, it makes business decisions and investments uncertain. If prices are changing, it's tricky for two firms to enter into a long-term contract. It's also difficult for people to plan for retirement, because they can’t be sure how much their money will buy.

Inflation hurts people on fixed-incomes because it means they can buy less. It tends to discourage saving and investment because when inflation hits, people rush to buy things before prices go up further.

Inflation also tends to benefit people who owe money and hurt people who lend it. As prices rise over the life of a loan, the money lent out loses value.

(Source: Federal Reserve Bank of Boston)size>

McGuirk isn't surprised to see shoppers pulling back.

"We're victims of our own success. We were tracking last year at 19 million car sales, so, I guess what happens is, you kind of catch up," McGuirk said.

Due to the recent weakness in car sales, this week Chrysler, Ford and a major parts maker idled factories. The parts maker announced layoffs, one of several indicators of trouble on the horizon.

The latest indicator: Xerox announced Saturday that after suffering its first quarterly losses in 16 years, it's laying off 200 production workers.

"We are seeing signs that almost always occuwhen we go into a recession. Weak car sales, stock market that's been under lot of pressure — mostly the Nasdaq, the Nasdaq's down over 50 percent. For some people, it feels like a recession," said Edward Yardeni, chief investment strategist, Deutsch Bank.

Other indicators of a possible recession are: home sales, down 3.9 percent in October; orders for durable goods, such as major appliances, down 5½ percent, and an increase in personal bankruptcies, up 10 percent since January.

Computer makers are also feeling the squeeze — sales this year are down 12 percent.

"A combination of a 50 percent drop in the Nasdaq as we're in the holiday season and oil prices that are really quite high for most people are going to combine, I think, to depress retail sales growth," Yardeni said.

The economy's Santa Claus could be Federal Reserve Chairman Alan Greenspan, who is expected to deliver a Christmas present of lower interest rates to ensure a soft landing from the boom, not a crash.

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