Anthony Chan
Anthony Chan
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When you listen to Greenspan's speech, you hear a fear about the sustainability of economic growth and no inflation pressures. Guess what that spells? Lower interest rates and postponing a return to higher rates, to insure the sustainability of growth.
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This report was very encouraging. It gives us stronger employment growth than the market was expecting while none of negative side effects of economic growth are present, such as higher inflationary pressure from wages.
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As the equity markets react positively to this change, we get a bit of a positive wealth effect which in turn should induce higher consumer spending.
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The good news is that if so many people are entering the labor force it must mean that they are perceiving an improvement in the economy's prospects, ... The bad news, however, is that if too many people become optimistic about their job prospects, then the unemployment rate will continue to push higher. And the higher unemployment rate does have a damaging impact on consumers. They see it and they think, 'I shouldn't be spending money.' That's one of reason the unemployment rate is so important. It's the one that drives what happens on main street.
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But what we've seen is if you hit the economy over the head enough times with higher energy prices and short-term interest rate hikes, it reacts.
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Lower energy prices will cushion the blow to the economy from the higher prices so far. Psychologically, it helps the consumer and that means the hit to the economy will not be as great as feared earlier.
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Our own studies have shown that consumers tend to switch over to non-store outlets in times of higher energy costs .
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I think this is the best of all possible worlds for the Fed. They'd like to see the economic expansion sustained without the side effect of higher inflationary pressure from wages.
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I think they feel the inflation risks are inching higher, but I don't think they're inching so much higher to suggest we have a serious problem at hand,
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When we exclude the effects of the recent hurricanes, we have to come away with the conclusion that despite higher energy prices and a battery of hurricanes, the job market is not doing all that bad.
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There doesn't seem to be any real urgency for firms to start hiring, precisely at a time we're seeing a reemergence of people becoming interested in looking for a job, ... Put the two together, and you have a formula for higher unemployment.
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With this figure, markets can remain all but assured that the Fed will continue to push short term rates higher well into 2006.
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While an economy is limping during the earliest or first stage of an expansion -- this is where we are -- the ability to pass on the effects of higher input prices like energy is quite limited. But as soon as the economy begins to gain traction, more of these prices can be passed on.
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He's saying so far there is sufficient flexibility that we can tolerate a higher deficit than we could 10 years ago. He didn't say ignore it.