A recent example of an economic number that upset the markets was the 5.7 percent unemployment number announced on August 1. Not a huge increase over what was forecast, but an increase nevertheless.
I am not alone in my, up one day and down the next, assessment of what is going on in the economy and the actions required by the Federal Reserve concerning interest rates. From the statement released after the FOMC meeting on August 5, it was stated that, “Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the committee.” With this in mind, my assessment above doesn’t appear to be an over simplification.
A further example of the turmoil the markets are experiencing was provided in the back-to-back headlines on the Bloomberg on August 14 that read, “Consumer Prices in U.S. Rise at Fastest Pace in 17 years, on Energy, Food,” and “Sales of Existing U.S. Homes Decline to 10-year Low; Medium Price Tumbles.” These two headlines tell us inflation is rising and the economy is slowing. This is a description of a phenomenon we discussed in an earlier FYI known as “stagflation,” which I referred to as “stagflation-lite.” In these two headlines we can actually identify the three or four areas that are causing our present turmoil: the consumer, the price of energy and food, and the present housing situation.
The most recent information regarding the consumer, who makes up greater than two-thirds of Gross Domestic Product (GDP), is somewhat positive at 1.9 percent, which was reflected in the first guess at GDP for the second quarter. The consumer’s situation improved when they received the fiscal stimulus package of roughly $100 billion, and as was expected, spent the money. Consumer spending has grown every quarter since 1992. Admittedly, some of the fiscal stimulus money was spent on fuel and food, but it was also spent on other things such as flat panel TVs and video games. Years ago, I wrote in an FYI to never underestimate the willingness of the consumer to spend. If we have it, we will spend it. This is also evidenced in the poor savings rate and the amount of credit card debt.
What about some good news? The good news is that the price of oil has declined from $145 per barrel to $113 per barrel. This is beginning to be reflected in the price of a gallon of gas at the pump, which is where you and I are affected. As has been reported before, the increase in the price of a gallon of gas is a direct tax, and if on a tight budget, as many of our fellow Americans are, it bites into, or wipes out your disposable income.
The side effect of a weaker price for a barrel of oil is a stronger dollar. While a stronger dollar is certainly important, especially from a patriotic point of view, it does not help our exports. The weak dollar has resulted in strong exports, which is one of the key areas of growth in this otherwise weak economy. Once again I find it hard to believe that every positive point seems to have a negative side as well. I guess that is what is meant by ying and yang. (I had to throw that in, with it being the Olympic season).
So which is it? As long as this current housing situation continues, and consumers are reminded daily of how bad things are, we will remain caught in the middle, with potential inflation on one side and a weak economy on the other. The end result is the overnight rate will remain where it is for a while longer, at 2.0 percent.
