Video-rental price drop an omen for economy

April 23, 2003|By Jay Hancock

IF YOU'RE hoping for a recovery, the wait may not be over. More bad news showed up in last week's inflation report.

The price of renting a videotape or digital video disc fell 9 percent in March compared with a year previously and shows no sign of stopping.

Several industry-specific forces are pounding down video rental prices.

By increasingly offering movies for sale and rental simultaneously, major studios have attacked the exclusive, rental-only period that once protected Blockbuster, Hollywood Video and other flick lenders. DVDs, which accounted for more than a third of the rental market last year, cost much less to manufacture than videotapes, and they're cheaper to store, too.

But the drop in video-rental prices may carry disappointing news about the larger economy, too. Things like this weren't supposed to happen.

For years, economists have been telling us about the deflationary effect of globalization on the price of cars, clothing, corn and other goods.

If you could touch it, package it and ship it, the ends of the Earth were your factory. Find the country with the cheapest labor and you were almost guaranteed to undercut competitors in developed nations. This path of least expenses explains the 34 percent plunge in the price of women's dresses in the past 10 years.

Of course, this works only if the product can be hoisted into a truck, ship or airplane. Low-cost Malaysian labor won't do consumers much good when they need a shirt cleaned, an appendix removed or a hotel room in Hagerstown.

These service products were thought to be pretty much immune to deflation, and for the most part, they have been. While retail prices for cars, refrigerators and other durable goods have been falling at an accelerating pace since 1997, for example, service-sector prices kept rising at about a 3 percent or 4 percent clip.

Now some economists see signs that prices for service products are being pulled toward the deflationary pit.

"Even as the deflation rate in core commodities has stabilized" in recent months, "the big story, which has actually pulled down the underlying inflation number the past couple of months, has been the events unfolding in the service industry," says David A. Rosenberg, Merrill Lynch's chief North American economist. "That's a nice splash of cold water for all the folks out there who said these sectors were immune to global price pressures."

Overall service prices, not counting energy services, were essentially flat in February and March after poking up three-tenths of a percent in January. And within that category were some noteworthy declines.

Hotel prices are down 2.5 percent in the past year and have plunged 3.3 percent since December, seasonally adjusted. Landline and wireless telephone prices have dipped six-tenths of a percent from a year ago. Airline fares are down almost 2 percent in a year. The cost of a video rental, also considered a consumer service, is almost as low as it has ever been.

At the same time, prices for other services, while not falling, have drastically decelerated from their accustomed pace of advance.

Most amazing are prices for surgery, checkups, nursing care and other medical services.

An important booster in the inflation rocket and long the bane of human resource administrators, health-service prices have risen only four-tenths of a percent since December, the smallest three-month increase since 1965, Rosenberg notes. Overall medical prices, including pills, salves and bandages, have been rising at a similarly slow pace.

Like the movie-rental shops, all these industries can give reasons for their loss of pricing power that do not seem to hint at overall implosion of the economy. Hospitals and doctors are under new pressure from employers trying to contain costs. Hotels and airlines are getting hammered by the slowdown in tourism. Phone companies are trying to cope with new competitors licensed by state and federal regulators.

But Rosenberg, looking down on the economy from his Manhattan aerie, sees common factors: excess capacity and lack of demand. These are the same problems hurting the rest of the economy, and now that the service sector is also showing symptoms of slowing inflation, he says, don't expect a pickup in interest rates or economic growth anytime soon.

He expects more interest-rate cutting by the Federal Reserve.

"In our view," he says, "it's a matter of how and when. Not if."

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