Robert Brusca
Robert Brusca
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Inflation decelerated across a broad spectrum of core CPI areas -- about 40 percent of prices in the core showed declines in their year-over-year growth rate. That's a big proportion. The Fed is concerned and has a reason to be concerned.
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What's going on here is we've got a lot of growth. We've seen very, very strong consumption.
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During this recent period there may be some extra spending on the part of those recovering from hurricane disasters. But it is also true that comprehensive consumer spending has been outstripping income growth over this period,
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As the rest of the world begins to recover and capital finds a better home overseas because U.S. bond yields don't look attractive and the U.S. stock markets looks like it fully valued or overvalued, ... (then) money doesn't flow here. And when money doesn't flow here, it starts to push bond yields up, and that starts to slow our growth and make the stock market look worse, and you start to get into this vicious circle instead of this wonderful circle you're in now.
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The trade deficit seems to only get bigger and never recede. The reasons are clear, oil prices are up, foreign growth is still relatively weak and US growth is strong. There is no reason to forecast a lower deficit.
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So while some special factors may be boosting spending, the overall trend of spending is well out of line with income growth. This tells us that this spending trend is unsustainable unless consumer income growth picks up sharply.
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Back before the recession, we had strong job growth and no inflation. There's fuzzy thinking going on here -- I thought we'd broken the old idea that strong growth is bad. As long as productivity growth can remain high, fast job growth is not a problem.
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Private sector job growth is still challenged. The report is not very good for the month alone, but the trends have actually improved, thanks to the revisions.
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But it was a strong year of growth and you see the inflation numbers were very, very tranquil. If anything, bonds are going to focus on inflation so we should be seeing a good bond market reaction to this.
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But even if you have a weak number next month, even if you get zero growth, you'd be averaging about 150,000 new jobs a month (for the last six months.) So the Fed would need to see something less than zero to change its mind.
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The fact that food sales outperformed other product categories last month is part of what's going on with the economy and its impact on consumers, ... Also, there was a time when Wal-Mart was eating everyone's lunch. Other stores have been getting their act together and they've reduced the growth gap between them and Wal-Mart.
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It means we sort of dodged another bullet on the inflation front. These kinds of numbers put the Federal Reserve in a difficult box. We don't have inflation, the economy is growing too fast, they are afraid it won't keep up, but it's hard for them to raise rates without any inflation on the doorstep.
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Housing may get another mini boost from the recent drop in rates. These data do lag a bit. Still, it is clear that, low rates or not, housing is not on fire the way it once was. The level of activity remains quite high for housing. But the prospects for further growth do not look that strong based on momentum.
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How could we have such a turnaround in job growth and have the Fed find that it doesn't change its assessment of risks in the economy whatsoever?