Seniors citizens and many public employees enjoyed a huge wage raise last January due largely to soaring oil prices in 2008. Social Security checks jumped 5.8%, about $60-125/month. Now the boost in checks from what should have been recognized as a temporary spike in inflation has to be paid back. Congress will debate how to avoid a cut in monthly checks.  But there is not enough agreement on how to fix long term social security funding problems for Congress to take any action.  They will still be tied up trying to salvage what they can from the troubled carbon tax and healthcare expansion proposals.

This is why the Federal Reserve Board is still more concerned with deflation than inflation. Deflation stemming from the collapse of energy prices and the deep recession is the more immediate threat to the economy. The recent huge increases in borrowing and spending are inflation threats but not until 2011.

Note that there was a one quarter interruption in the progressive decline in consumer spending in the first quarter of 2009 when the 2008 inflation caused a jump in the size of government checks. Expect the reverse fiscal impact in the first quarter of 2010. Slower growth in consumer spending, possibly a small decline, will restrain GDP growth in Q1 2010.

This is just the beginning.  The consumer spending slowdown will cause small reductions in investment spending, including construction, as well as wages and the income taxes paid on the wages. Similar to a spike in inflation, an abrupt period of deflation, however brief, will take 3-4 quarters to work through the whole economy.

On the demand side the consequences for construction are negative as they are for all industries. But on the supply side deflation will lower nominal interest rates providing a small temporary boost to all interest rate sensitive spending.  More importantly, weak prices and restrained general spending will give the Federal Reserve Board leeway to keep monetary policy simulative with inflation adjusted interest rates below their marker equilibrium well into 2010. This is positive for sellers of interest rate sensitive products.

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