Back to the 1970s

A slew of fresh economic data has renewed fears that the U.S. economy is facing a 1970s-style combination of weak growth and rising prices. Let's go to the videotape:

Item 1: Weekly jobless claims posted an unexpected increase last week, which suggests that the economic recovery is far from steady or certain.

Item 2: Producer prices rose 1.4 percent in January. The gain was more than three times as much as a 0.4 percent rise in December, and it was nearly twice as much as the the 0.8 percent rise that economists expected for January.

Item 3: Wal-Mart sales are lower because the retailer had to cut prices. That shows that demand is weak and that retailers are going to have a tough time passing along higher wholesale prices to their customers. That lack of pricing power bodes ill for corporate profits, which is a bad sign for the employment outlook..

Item 4: Please see item 1. Can you say "negative feedback loop"?

There are some mixed signals on the economy. The news isn't all bad. The index of leading indicators points higher. But overall, fears of a slower economy and higher costs are dominating. As a result, the interest rate on longer-dated securities such as 10-year Treasury bonds is rising, relative to shorter-dated securities. That steepening of the so-called yield curve reflects fears that inflation will rise in the future, and that bond investors want higher yields to compensate them for taking that risk. That's because inflation erodes the value of fixed-income investments.

“The steep yield curve is starting to reflect signs of stagflation,” Michael Franzeze, managing director and head of Treasury trading at Wunderlich Securities in New York, told Bloomberg News. “The short end will remain tied to the Fed funds. Yet we are seeing inflation signs and as a result, long dated maturities are getting hurt.

As the Bee-Gee's said: We're stayin' alive, stayin' alive…