Ethan Harris
Ethan Harris
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The one thing that companies can do quickly without laying people off is reduce the number of hours per week; as the economy slows, that's the natural place for a company to cut back. It's a little harder to pull back quickly on job hiring.
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We are obviously experiencing slower growth and the payroll numbers don't really reflect that yet, which is why they will be an important indicator. Companies have been cutting back the number of hours their workers put in and in some cases cutting back their workforce altogether, and that is what people will be looking for in the numbers.
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In an ideal world, three simultaneous gradual adjustments would happen. The U.S. eliminates the budget deficit, China revalues by 30 percent and China works to rebalance growth more to consumption and less to exports. Of course none of this will happen and the pressure for protectionism from Congress grows.
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It's not as friendly as some of the other inflation numbers, but it's just one indicator. We have no inflation warning signals from any of the other major inflation indicators.
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It's not a question of a sudden explosion in prices. It's more an erosion of the low-inflation psychology.
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Everyone is all zeroed in on the consumer now, but the truth is that the consumer isn't the driver now. Confidence is picking up, but still at average levels. Wage growth is slow and the bulk of the tax cut is already in place. Finally, with all the debt people have taken out over the past several years the burden of paying monthly bills is leaving less for discretionary spending.
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The bond market went into this report looking for disaster. I think there's a sense of relief in the bond market.
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The best tack is to move by a quarter point, with the promise that there will be more cuts to come if the economy remains weak. You can't maintain that promise with big bulky rate cuts.
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The basic story of the consumer is that he's OK in the near term and at risk in the medium term.
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The adjustment to higher prices has been fairly orderly. It's not a 70's style shock. Oil prices do have an effect on the economy but it's not dramatic. It's a problem but not at the top of the list.
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They keep fiddling with the language, and the general tone of the directive keeps getting a little less dovish. Being 'patient' sounds a little less like they're keeping rates on hold than a 'considerable period' -- though you'd need to study a dictionary closely to figure that out.
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There's this alternative scenario where the financial crisis starts to bleed into the economy in a major way,
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The retail sales report is a little bit misleading,
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The Fed's kind of locked into this cautious optimism mode. Everybody there has the same line about how once geopolitical risks abate things will get better.