Wayne Ayers
Wayne Ayers
call environment expect financial happen markets point stable view
From the Fed's point of view we've had head-fakes before -- I think they want to see a more stable environment for financial markets before they call it a day. I don't expect that's going to happen overnight. We will see a sustainable slowdown, but it may not happen right away.
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I don't think anyone has seen this happen so quickly. I don't think Alan Greenspan has seen it happen so quickly. So he's taking out an insurance policy for himself. My best guess is that they (The Fed) are running scared. At this point we've seen such pronounced weakness across all areas of the economy that I think they're fearful this downturn is going to be very different than any in the past.
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We are not going to see the strong increases in productivity that we've become accustomed to and I think we're at that point now and that's the message in these numbers.
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I think (Fed Chairman) Alan Greenspan has made it all but official, we'll get another rate cut in June, but my guess is a quarter point rate cut, principally because of what we're seeing on the inflation report. The CPI and PPI have been trending up over the last two years.
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The second half will show some better growth. Will that be sustained past the second half? For that, two things have to happen: we have to see a pickup in business spending, and the labor market has to stabilize and improve, creating permanent employment. We don't expect to see that until year-end.
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Productivity growth helps keep inflation at bay and allows real incomes to grow, but it makes businesses even slower to hire than usual.
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Productivity always slows as the economy slows. If labor and wage costs are still on the rise and productivity slows, either corporate profits decline or prices increase.
I think if you take those two things together, there is some hope.
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The anecdotal evidence of the beige book seems to confirm what all these economic reports have been saying.
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We'll probably have a moderate-paced recovery. I couldn't agree more with the Greenspan's forecasts that it would be a sub-par recovery.
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I find it strange that we had one of the biggest declines in employment in almost two years and no one noticed, and I'm sure they're thinking the same way over there at the Fed.
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To me, the business cycle is working as it always does, absent an external shock. Inventory liquidation means firms have to increase production, and they're already doing that. They're also increasing the length of the work week and hiring temporary workers. All these things support income and spending.
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The good news is that this is going to go directly to the corporate bottom line. That's a real plus for profits, which means a real plus for corporate spending and the recovery going forward.
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Firms in the past year have continued to invest in equipment and technology to improve productivity. And with good reason -- the cost of capital is below the cost of labor.