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This week Dr. Scott Anderson of Wells Fargo Economics shares with us some good news, some bad news and some more bad news on the current state of the economy. He looks at the huge dilemma facing Mr. Bernanke and the Fed this week and in the weeks and months to come.
We Begin With Some Good News · Friday’s November payroll report revealed respectable job creation (- 94,000 jobs), despite sizable job losses in construction, financial services, and manufacturing. · The household employment survey showed 696,000 jobs created in the month of November, which kept the unemployment rate steady at 4.7%. · GDP growth over the past two quarters has been extremely robust, despite the steep declines in the U.S. housing market. · Dr. Anderson concludes that if job and income growth remain robust, it seems unlikely that the worst forecasts of the U.S. consumer will actually happen. (We can only hope he is right!!)
Now Some Bad News from the Bond Market · According to Dr. Anderson, the bond market is still firmly in the recession camp. · The Fed funds futures market shows that investors are expecting at least another 125 basis points in Fed rate cuts by September 2008 (a bad sign for their projection of the economy). · The flight of capital to risk-free assets has caused the Treasury yield curve to plunge since the Fed began cutting rates in September. · Meanwhile, credit spreads that measure investor concerns about default risk, have risen substantially above their September peaks.
More Bad News about Tightening Credit Standards · Banks are responding to their rising cost of funds and declining credit quality by shoring up their lending standards. · Banks are even tightening their standards on business loans, even though business balance sheets and cash flows remain relatively healthy. · Historically when credit tightens so broadly, the economy tends to land in a funk, if not outright recession. · Dr. Anderson warns us that it wouldn’t take a large increase in unemployment to make credit conditions significantly worse, as more consumers and households would default on their debts.
And Even More Bad News about Inflation · Headline inflation is much higher in the fourth quarter of this year, which is causing concern among investors. · A survey by the University of Michigan projects inflation to hit 3.5% over the next 6 months, which is the highest projection for this survey since August 2006.
So What Can/Should/Will the Fed Do? · Dr. Anderson believes the Fed will focus on the evolving credit crunch despite signs that the economy is still operating respectably. · He projects a small rate cut this week which would keep the door open for further cuts down the road. · He suspects future data will continue to disappoint, which would prompt another .25% cut from the Fed in January. · Beyond that he would not rule out further cuts, but he projects that the hurdle rate for further cuts would be much higher due to inflation risks.
Well, that’s Dr. Anderson’s view. What do you project? As always, our story will continue to unfold, so stay tuned…….
THOUGHT FOR THE WEEK
No Worries….
Our friends from Australia have brought to America their ever-present refrain, “No Worries, Mate”.
Here in America it seems that we have an obsession with worrying. We worry about the sub-prime mess….about the war in Iraq….about global warming….about the safety of our kids.
So what is it to worry? Webster’s defines “worry” as follows: “To feel a nagging fear about something”.
Do we really want to live our lives consumed with fear?
Worrying won’t help to make any of our issues go away. It won’t make us feel better. It won’t inspire us to do our best, to be our most creative, or to search for solutions.
Worry can be like a cancer….it can darken our days, it can spread and grow, and it can make us sick.
We would all be wise to take a lesson from our friends down-under. Rather than worrying our lives away, why not fill our days focusing on things that we can do something about…and then doing them?
As we head into the holiday season, may we each choose to break the worry cycle, and to fill our lives with confidence and with action. May we each remember the spirit of Australia…..No Worries, Mate!
Have a good week.
David David Rosenthal, MAI
Curtis-Rosenthal, Inc. Offices in Los Angeles, San Francisco and Newport Beach Proudly serving the California Marketplace since 1983
Friends and Colleagues
This week Michael Swanson of Wells Fargo Economics presents us with some surprisingly positive data and some growing risks about the economy. Despite the gathering storm clouds of investor sentiment, we look to the data to shed some light on what is really going on out there.
The Dilemma of the Fed · In a continuing trial-by-fire, the Bernanke Fed has to decide whether market turmoil should overshadow economic fundamentals. · Economic growth indicators continue to surprise to the upside, but the marketplace doesn’t want to hear it. · So what is the Fed to do?? (Answer below….)
Some Good Economic Data · Per Swanson, this week’s economic releases might change 3rd quarter GDP growth estimates from 3.9% to around 5.4%! (Now that certainly doesn’t sound like a recession.) · September 2007’s trade imbalance improved by $7.7 billion (or 12%) to -$56.4 billion vs. -$64.1 billion in Sept. 06.
But the Weaker Dollar Brings With It Some Economic Risks · The recovery in foreign trade was started by the weaker dollar, but Swanson warns of a real risk if the slide gets out of hand. · The weaker dollar represents an inflation challenge to imports and a possible investment crisis. · The weaker dollar combined with surging commodity markets could arrest the downward trend in general inflation.
More Concerns Resulting From the Improving Trade Balance · Swanson projects that higher GDP growth supported by the improving trade balance would cause greater employment growth. · While above-average employment growth is good for employees and people looking for work, it also stokes the flames of inflation. · Swanson points out that sustained high employment growth is “the most inflationary factor in any economy since labor accounts for 70% of business expenditures”.
But Where Are The Workers? · Swanson warns the Fed to consider where the additional work hours would come from since US labor force growth continues to slow. · The Congressional Budget Office in August projected labor force expansion of 0.9% and hours worked expansion of 0.6% for the next 5 years. · This represents declines of 18% and 25% respectively, from the 2002-2006 period growth rates. · The economic expansion since 2003 has absorbed all the excess labor from the slack labor market in 2002. · Thus, future growth will need to come from natural population expansion or more hours worked per employee.
Is Inflation On The Horizon? · With very little labor slack predicted, the Fed must balance the risk of easing the market’s current turmoil with the prospect of fueling inflation. · Just as GDP statistics are cold comfort for the unemployed, the BLS’s current estimate of low inflation seems to be of little solace for every consumer who is paying for higher food and energy inflation.
So What Can/Should/Will The Fed Do? · Given the currency and inflation risks, Swanson projects that the Fed will be emphasizing economic fundamentals. · He suggests that the market needs to take the Fed at its word - that it will be data-driven going forward. · According to Swanson, other than the housing market, the current data clearly points to no more interest rate cuts.
What Are We To Conclude? · In Swanson’s words, “That doesn’t mean that volatility will decline. So hold on tight. It’s going to be a bumpy ride.”
Thus our saga continues….so as always, stay tuned…….
***************************************************************************************** I am proud to announce that my wife, Betsy Rosenthal now has a web site* for her second career as an author of Children’s Books. Please check out her published books by taking a stroll through Betsy’s web site at: www.BetsyRosenthal.com
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THOUGHT FOR THE WEEK
Trust….
Our relationships grow and flourish when we build trust with one another. They wither and die when we destroy trust.
We build trust and nurture our relationships when we: · Do what we say we are going to do. · Tell the truth…even when it is difficult. · Are loyal to those who are not around. · Honor our commitments…even when it is not convenient. · Communicate proactively with others. · Think of how our actions impact others.
We destroy trust and harm our relationships when we: · Do what we feel like doing. · Say what others want to hear, even when it is not true. · Gossip and tell stories about others. · Make others guess whether we will perform or not. · Make others chase us to stay in touch. · Think only of ourselves.
Trust takes a long time to build…but it can be destroyed in an instant. Every day we make decisions that determine whether we are building or harming the trust that is the foundation of our relationships.
In the week ahead, may we each make choices that will cause others to trust us. By doing so, may our relationships grow deeper and our pride in ourselves grow stronger.
Have a good week.
David David Rosenthal, MAI Curtis-Rosenthal, Inc. Offices in Los Angeles, San Francisco and Newport Beach Proudly serving the California Marketplace since 1983 310-215-0482 ext. 225 You have received this e-mail because you requested to receive the Economic Update via e-mail. If you would like to be removed from this list, please reply with the word "Unsubscribe" in the subject line.
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