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Besides millions of layoffs and plunging GDP, here's another worry for economy: falling prices – USA TODAY

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As if Great Depression-size job losses and a cartoonish contraction in the nation’s economic output weren’t enough, analysts are starting to fret over a new risk from the coronavirus pandemic: deflation.

Deflation, or a sustained period of falling prices, may sound like a good thing: Goods and services cost less, saving consumers money. But deflation prompts shoppers to put off purchases on the expectation that prices will fall further if they wait. That can lead to a toxic cycle in which lower spending prompts businesses to cut wages, further pushing down consumer purchases and prices.

Deflation also can make it harder to repay mortgages and other debt, which become costlier in inflation-adjusted terms.

The economy can get stuck in a rut, similar to the “lost decade” that battered Japan in the 1990s.

Economists similarly worried about deflation during the Great Recession of 2007-09. But while average annual price increases dipped below 1% in 2010, they never declined. The current recession, however, has featured a more abrupt and dramatic blow to the economy.

“I think the risk of the U.S. falling into a deflationary trap is higher now than at any time during the Great Recession,” says economist Ryan Sweet of Moody’s Analytics.

The U.S. is not now experiencing deflation. Sure, oil prices have cratered to historically low levels and gasoline prices are slowly following them down. But when assessing deflation, economists generally put aside food and energy costs, which are highly volatile and likely to recover from near-term ups and downs.

A measure of prices excluding food and energy costs that the Federal Reserve watches closely – known as the core personal consumption expenditures (PCE) price index — rose 1.7% annually in March, below the Fed’s 2% target but nothing close to a yearly decline. Yet the shutdown of much of the nation’s economy to contain the coronavirus – along with more than 20 million related layoffs – has hammered consumer demand.

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In response, airlines already have slashed ticket prices. Hotels are expected to follow suit, Morgan Stanley wrote in a research note. In March, apparel prices were down 1.6% annually and new vehicle prices fell 0.4%.

Perhaps a bigger concern is that the sudden drop in consumer spending, amplified by the layoffs, has hammered business revenues, forcing many companies to lower wages at least temporarily, says Barclays economist Blerina Uruci.

A myriad of companies have announced executive pay cuts, including Delta, Marriott, Macy’s, Bed Bath and Beyond, Nordstrom and Macy’s.

Many small businesses are also reducing wages for low- and midlevel workers as sales have plummeted. Creative Noggin, a marketing company in Boerne, Texas, has trimmed salaries across the board by 20% to 30% rather than lay off any of its 14 employees, says CEO Tracy Marlowe.

Lower wages can further dampen consumer spending, forcing additional price cuts, Uruci says. Reduced pay, she says, also gives business more room to lower prices and maintain at least modest profits.

During the Great Recession, by contrast, most businesses didn’t cut wages despite unemployment that hit 10% because they didn’t want to lose their most skilled employees, Uruci says.

Barclays expects the rise in the core PCE index to average 0.6% from the third quarter of 2020 through the first quarter of next year. That’s a meager price rise but it’s not deflation. And Sweet says he would need to see price drops persist for more than six months to label the episode deflation.

Morgan Stanley says certain bonds that hedge against inflation are implying a 55% risk of deflation over the next two years, but the research firm says the market is far overstating the chances.

The Fed is doing its part to head off deflation by making clear it will do what it must to spur stronger demand and higher prices by lowering borrowing costs.

“As long as inflation expectations remain anchored, then we shouldn’t see deflation,” Fed Chair Jerome Powell said at a news conference last week. “Needless to say, we’ll be keeping very close track of that.”

But with inflation expected to fall to such low levels in coming months, it wouldn’t take much to push the economy into a deflationary spiral, Sweet says. After all, long-term forces such as discounted online shopping and the more globally-connected economy have been keeping inflation below the Fed’s target for years. 

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Now, many states have started to allow shuttered business to reopen and a solid recovery is expected by summer, assuming the outbreak eases substantially by then. But if that doesn’t happen, or if the virus returns to a significant extent in the fall or winter, that could halt the rebound and increase the chances of deflation, Sweet says.

“We can’t afford anything else going wrong,” he says.

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Economy

Canadian dollar moves to extend weekly win streak as oil rebounds

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Canadian dollar

The Canadian dollar strengthened against its U.S. counterpart on Friday and was on track for its seventh straight weekly gain as oil prices rose and domestic data added to evidence of robust economic growth in the first quarter.

Canadian factory sales rose 3.5% in March from February, led by the motor vehicle, petroleum and coal, and food product industries, while wholesale trade was up 2.8%, Statistics Canada said.

The price of oil, one of Canada‘s major exports, reversed some of the previous day’s sharp losses as stock markets strengthened, though gains were capped by the coronavirus situation in major oil consumer India and the restart of a fuel pipeline in the United States.

U.S. crude prices rose 1.2% to $64.61 a barrel, while the Canadian dollar was trading 0.6% higher at 1.2093 to the greenback, or 82.69 U.S. cents, moving back in reach of Wednesday’s 6-year peak at 1.2042.

For the week, the loonie was on track to gain 0.3%. It has climbed more than 5% since the start of the year, the biggest gain among G10 currencies, supported by surging commodity prices and a shift last month to a more hawkish stance by the Bank of Canada.

Still, BoC Governor Tiff Macklem said on Thursday if the currency continues to rise, it could create headwinds for exports and business investment as well as affecting monetary policy.

The U.S. dollar fell against a basket of major currencies, pressured by a recovery in risk appetite across markets after Federal Reserve officials helped calm concerns about a quick policy tightening in response to accelerating U.S. inflation.

Canadian government bond yields were lower across much of a flatter curve, with the 10-year down 2 basis points at 1.549%. On Thursday, it touched its highest intraday in eight weeks at 1.624%.

 

(Reporting by Fergal Smith; Editing by Nick Zieminski)

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Economy

Toronto Stock Exchange rises 1.21% to 19,366.69

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Toronto Stock Exchange

* The Toronto Stock Exchange‘s TSX rises 1.21 percent to 19,366.69

* Leading the index were SNC-Lavalin Group Inc <SNC.TO​>, up 16.0%, Village Farms International Inc​, up 9.8%, and Denison Mines Corp​, higher by 9.4%.

* Lagging shares were Aurora Cannabis Inc​​, down 7.2%, Centerra Gold Inc​, down 3.8%, and Canadian National Railway Co​, lower by 3.7%.

* On the TSX 194 issues rose and 35 fell as a 5.5-to-1 ratio favored advancers. There were 25 new highs and no new lows, with total volume of 225.7 million shares.

* The most heavily traded shares by volume were Enbridge Inc, Manulife Financial Corp and Cenovus Energy Inc.

* The TSX’s energy group rose 3.32 points, or 2.7%, while the financials sector climbed 4.80 points, or 1.3%.

* West Texas Intermediate crude futures rose 2.65%, or $1.69, to $65.51 a barrel. Brent crude  rose 2.68%, or $1.8, to $68.85 [O/R]

* The TSX is up 11.1% for the year.

This summary was machine generated May 14 at 21:03 GMT.

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Economy

U.S., Mexico, Canada to hold ‘robust’ talks on trade deal

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The United States, Mexico and Canada will next week hold their first formal talks on their continental trade deal, with particular focus on labor and environmental obligations, the U.S. government said on Friday.

Trade ministers from the three nations are set to meet virtually on Monday and Tuesday to discuss the U.S.-Mexico-Canada (USMCA) deal, which took effect in July 2020.

“The ministers will receive updates about work already underway to advance cooperation … and will hold robust discussions about USMCA’s landmark labor and environmental obligations,” the office of U.S. Trade Representative Katherine Tai said in a statement.

The United States is also reviewing tariffs which may be leading to inflation in the country, economic adviser Cecilia Rouse told reporters at the White House on Friday, a move that could affect hundreds of billions of dollars in trade.

The United States, testing provisions in the new deal aimed at strengthening Mexican unions, this week asked Mexico to investigate alleged abuses at a General Motors Co factory.

(Reporting by David Ljunggren; Editing by Hugh Lawson and Jonathan Oatis)

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