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TABELL'S MARKET LETTER 5 VAUGHN DRIVE, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS. INC 1609) 987-2300 August 21, 1992 On occasion, something appearing in this space produces reader response, and we are always glad when this occurs. Approximately a month ago, we-publishelfa piece-which nOled that,- in our vieW; there seemed-toexist a widespread popular– belief that the rate of inflation in the United States was greater than was actually the case. To prove our point, we CIted the recent history of the Consumer Price Index. A reader sent us a comment thereon which we thought both stimulating and provocative. A portion of that comment is quoted below. I am aware of what government statistics on inflation reflect, but I some times wonder whether or not the CPI truly is indicative of the upper income people with whom you generally deal. My guess is that the prices ofso-called luxury automobiles have risen in the last six years far more than 4 percent. I believe that most professional fees (particularly those for lawyers and accountants) have rISen more than a 4 percent annual rate. The price of .. meals (and) the price of travel, in my opinion have… risenfar more than 4 percent. It may well be that the factors that make up the CPI, andfor the average American, have not risen more than 4 percent. but I do believe that the factors that many of us who are blessed to be in the upper income levels pay for have risen more than 4 percent. As noted above, we thought this to be an astute observation, and It is possible to respond to it on a number of levels. The facile and cynical response, of course, would be to say that it is difficult to work up a great deal of sympathy for the nch because the cost of their BMW's and divorces is increasing. Such an answer, though, would be neither honest nor responsive to what is essentially a valid point. Thus we can move on. Our first thought is to note one distinguishing characteristic of the relatively affluent segment of the popUlation to which our reader refers. Its members are more likely than not to be investors. This letter is, of course, written for investors, and It has always been our contention that investment should be based on facts. It IS indeed a fact, as we noted in our letter. that the rate of increase in the CPI, whatever that index mayor may not describe, has, over the past six years, been just over four percent. Investment decISIOns should be based on recognition of that fact. This, we suppose, was really the point we were most desirous of making. The next observation that should be made is that the fact that some of (he items our reader cites hav Qeen rising fasteL '!hanthe general price level is not indeed;Surprlsfrig. It is basic ec-;;oic iaw-that those items possessmg a high labor content (and professional fees have a close-to-100 labor content) are the least susceptible to productivity improvement which is, basically, the result of capital expenditure. (As we recall, our college economics textbook cited the price of haircuts as an example of this phenomenon, something we ruefully remember when thinking the 35-cent cost of a trim in our youth.) Which leads to yet another point. Services, precisely that sector of the economy in which productivity gains are supposed to be limIted. are becoming an increasingly important component of the economic mix. Purchase of services accounted for well over half of all personal consumption expenditures last year. When manufacturing constituted the most important part of gross naltOnal product, significant productiVIty gains were possible and could make important contributions to economic growth. As the service sector becomes mcreasingly important, there emerges a real question as to whether we will be able to continue to manifest the same rate of growth. Note that we are posing a question rather than making a forecast. (Gary Shilling has identified service sector productivity as being one of the great potential growth areas of the 1990's. If this is 50, it will, it seems obvious, generate investment opportunities in abundance.) Perhaps the question our reader IS really raising here, then, is one not of rising prices, but of the prospects for continued economic growth. If we are to continue the tradition of little or no productivity gam in the service sector, then, as that sector becomes an increasingly important part of the economy, longer-tenn growth prospects become limited. It is this sort of thing that observers of the economic scene are talking about when they discuss the modest change over the past decade in what is really the economic bottom line—real disposable personal mcome per capita. It is what they are talking about in a more immediate context when they discuss the rather strange behavior of the economy in its current recovery from recession—the double-dip (or is it a triple-dip) pattern that has been widely noted. To carry this argument further, let us look at the sorts of expenditures our correspondent is referring to from the consumption as well as the production side. A century ago, the primary economic concern of even the more affluent American did not center upon automobiles vacation travel or an accountant to do his tax return. It focused rather on simply earning enough to feed his family. The rising standard of living which has been the centerpiece of our economIc hIstory has e55enttally consisted of an Increasmg proportIon of luxury It goods In the consumer-spending pattern and the consequent decreasmg percentage expenditure on baSIC necessIhes If a charactenstlc of less-than-essentIal goods 10 the American economy is gOlOg to be a continued increase in theIr relative pnce. the logIcal economIc result. it seems to us, will be a scarcity of such goods TIns IS one way of describing a falhng or stagnant standard of livtng. ThIS tn turn is characteristic not of an tnflationary—but a deflationary —economy, one where we would be lookmg at the really unthinkablemdecreasing prices. This is a not Impossible prospect If productiVIty gains at the historical rate become unattainable in an expanding service sector. ANTHONY W TABELL, CMT Dow Jones Industnals (1200) 3291.12 DELAFIELD, HARVEY, TABELL Standard & Poors 500 (1200) 41691 CumulatIve Index (8120192) 7542.08 No statement or expression of opinion or any other matter herein contained is, or is to be deemed to be, directly or indirectly, an offer or the solicitation of an offer to buy or sell any security referred to or mentioned. The matter is presented merely for the convenience of the subscriber. While we believe the sources of our information to be reliable, we in no way represent or guarantee the accuracy thereof nor of the statements made herein. Any action to be taken by the subscriber should be based on his own investigation and information. 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