U.S. economy on tightrope between inflation, recession

With the hodgepodge of indicators that now sums up the U.S. economy, it is no wonder that Americans are developing a twitch.
The Federal Reserve lowers some key interest rates — reach for the wallet? But wait: Unemployment is up. On the other hand, the service sector is holding its own. But then, manufacturing orders are down, and there's the whole housing-market plummet.

What to do?

In most of these cases, the answer appears to be, do as little as possible. Meanwhile, the Fed itself is keeping a nervous eye on at least one indicator: inflation.

For those who have never had to wrestle with inflation, it is a rise in the prices on goods and services that occurs when there is a tightening of the supply of goods. In recent years, this hasn't been a major factor. But inflation is now hovering at 2.7 percent, apparently because of a weakening job market and continued high food and energy costs. This is seven-tenths of a point above the Federal Reserve's comfort level. As a result, Chairman Ben Bernanke said last month that inflation is the Fed's "predominant policy concern."

The chairman made that statement before the interest rate cut in September, but most of the news since has been less than rosy. Thursday, the Commerce Department reported factory orders, both for durable and nondurable goods, fell in August by 3.3 percent, worse than expected.

Meanwhile, the Labor Department is reporting claims for unemployment benefits took their biggest one-week jump in four months. The full labor report is due today, and analysts are looking for any kernels of good news they can scratch out.

Driving most of the downward trends, analysts say, are the housing slump and credit crunch.

Those factors alone could put the nation into a recession.

Many economists want more aggressive action from the Fed to head off a recession, but it is a fine line that must be treaded. If the Fed cuts interest rates too deeply, it will contribute to inflation, especially if energy prices remain high — and all indications are that they will. If there are no further cuts, an economic slowdown appears inevitable.

Our economy is in an extraordinary position. We are at war in Iraq, but because the country has not been asked to actively participate, there is no bump in manufacturing and jobs as usually comes with arming a nation for military conflict. At the same time, the administration continues to ask for huge sums of taxpayer money to further the war.

In past wars, wage and price controls were imposed to control inflation, but such controls, never an attractive method, would certainly be detrimental now.

The best course may be to aggressively cut government spending. Being tight with taxpayers' money seems to be the most difficult remedy, but it does not have to be. But until we put leaders in the White House and Congress who care about protecting our money, we can expect inflation or recession. The happy medium is rapidly disappearing.