Ethan Harris
Ethan Harris
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Are the economic indicators looking like a recession? Absolutely. But you can still hold out hope that the war is resolved in a month or so and the economy can stage some kind of recovery.
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At every stage in the past three years, employment has disappointed relative to overall activity. It's a chronic issue, and there's been a tendency for economists to hope this will finally be the month when improvement occurs. But I have no reason to believe it will.
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Even with a positive outcome in the war, the economy is going to have lost a lot of momentum by the time it's over. We're not going to see a few weeks of weak data -- we'll see a few months of weak data.
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We knew we would have a very weak number because of a collapse in auto sales after two big months in a row and the incentives kind of stop working ... But if you look at the rest of the report, every single major component was up. It was very broad-based growth across many components.
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We've gone from a period where there was a reasonable chance the Fed might cut rates just four months ago to one in which the Fed is very much comfortably just sitting on hold for now.
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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.