The Economy: The Next Shoe To Fall? (Update) genre: Polispeak & Six Degrees of Speculation
Update:
The stock market tumbled over 180 points today as inflation fears continue to grow. The New York Times has the full article here.
"The main thing that ails the stock market is uncertainty about the Fed and inflation," said Ethan Harris, chief United States economist for Lehman Brothers. "I think the stock market is beginning to figure out that inflation is becoming a danger. Where they pretty much ignored inflation for a long time, now it's becoming an issue."
Adding to the anxiety on Wall Street today, Michael Moskow, president of the Federal Reserve Bank of Chicago, expressed concerns that inflation was running high. His remarks, broadcast on CNBC during an interview, raised concerns that the central bank could raise interest rates for a 17th straight time when it meets next month.
Wall Street analysts also pointed out that market downturns are symptomatic of an economy that is cooling. "Until the stock market can feel comfortable that this is going to be a modest inflation pick up," Mr. Harris said, "investors are going to be worried. So it's understandable that there's some repricing going on."
The latest news cannot be welcome since Karl Rove and other Republican strategists are suggesting the Party feature the strong economy in the upcoming midterm elections in November. Bloomberg.com has an article detailing the possible problems with such a strategy here.
May 30 (Bloomberg) -- Karl Rove, President George W. Bush's top political adviser, laid out a plan to win the 2002 congressional elections by stressing national security. For 2006, Rove is framing a strategy for Republicans to sell the U.S. economy.
In a recent speech, Rove argued that Bush's policies of tax cuts and trade agreements had pulled the nation out of recession, created millions of jobs, boosted productivity and increased disposable income. That record can help lead Republicans to victory in November, Rove said in the May 15 speech at the American Enterprise Institute in Washington.
Political experts say it may be a tough sell: Voters don't feel optimistic, polls show, and growth rates are expected to slow as the housing market cools and gasoline prices remain near all-time highs.
Seventy percent of 1,002 respondents in a May 8-11 Gallup poll said the economy was in fair to poor condition, up from 63 percent in an April poll.
Two days after Rove spoke, the government revised upward the inflation figure he had cited to 2.3 percent, the biggest year-over-year gain since March 2005. Economists say that may be a sign the robust economy is allowing companies to pass along higher costs of labor and commodities.
The Fed is watching the real estate market, recent comments by central bank officials indicate. Fed Chairman Ben S. Bernanke, in testimony last month to the Joint Economic Committee of Congress, said a slowdown in housing "could prove a drag on growth this year and next.''
While many of the economic numbers have indicated a relatively strong economy over the last 12 to 18 months, the data has not translated into consumer confidence in the economy. With that in mind, touting the economy as a winning issue may prove to be a difficult proposition. If the economy does take a marked downturn, the Republican Party may have even less to talk about as it seeks to hold control of the House and the Senate.
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Original Posting:
There is growing evidence that the economy is beginning to slow. As interest rates have risen steadily, it appears they are having an impact on house sales. Read the full article here. While the Bush administration has touted their policy of tax cuts as the leading factor in the strength of the economy, many would argue the historically low interest rates have actually been responsible for keeping the economy growing.
As interest rates move closer to traditional levels, it will be interesting to watch the economic indicators. I've long felt that low interest rates have falsely supported spending for several years and allowed many homeowners to fund added spending through refinancing to remove equity as well as to take advantage of even lower rates found in adjustable rate loan products offered in the highly competitive mortgage business.
New-home sales rose last month, but failed to keep up the robust growth pace of March. The home sales numbers, along with a second government report yesterday that showed a steep decline in orders for durable goods, were seen as pointing to a softening economy.
But the numbers did little to reassure investors hoping that the economic data would encourage the Federal Reserve not to raise interest rates when it meets next month.
With consumer prices on the rise and fears of inflation growing, many investors worry the Fed may raise rates for the 17th consecutive time in two years.
The new housing data appear to confirm what many economists have already said: as real estate speculators bow out of a peaking market and mortgage rates rise, the torrid pace of home sales is cooling. Compared with last April, sales of new homes fell 5.7 percent.
Inventories are also rising, yet another sign of weakness in the latest housing data. At the end of April, the number of homes for sale reached a record 565,000.
With mortgage rates climbing, many economists believe home sales will decline this month.
If interest rates continue to rise, many homeowners who gambled on adjustable rate loans may find their mortgage payments increasing to unexpected levels. Foreclosures are on the rise in several areas of the country and may continue to accelerate as loans are adjusted to current rates.
Many in the Bush administration have been troubled by the lack of consumer confidence in what appears to be a healthy economy based on a number of indicators. I'm inclined to believe that the tepid sentiment reflects the awareness by many consumers that should interest rates continue to rise, they will find themselves with higher mortgage payments and an inability to refinance in order to withdraw the equity that has been used to fuel much of the economic growth. The average consumer realizes that wage growth and new employee demand has not driven their ability to increase spending.
I've long feared that we are operating in an artificial economy that cannot ultimately be sustained. Given recent signs of inflation, there may be mounting pressure to return to a more traditional and conventional monetary policy. How that may impact the economy is difficult to predict which in my view makes the recent economic policies all the more questionable. We have little historical data to predict the impact of the policies of the last several years. The next president may find that he or she will have to deal with the situation in Iraq as well as a troubled economy and a burgeoning national debt.
Daniel DiRito | May 30, 2006 | 4:31 PM
Comments
1 On May 30, 2006 at 6:58 PM, jimi wrote —
Daniel,
If I had a good government or quasi-government job I'd feel better. There is a new Target hub opening in town. They pay the going wage of 2001, $14 an hour. I am pessimistic, but ever hopeful.
In the hardest of times, our humanity and good nature shines most true when we extend a hand.
2 On May 30, 2006 at 7:39 PM, brisa wrote —
The economy is adjusting to it's own collapse. Never in our history have energy depletion and supply/demand imbalance become the status quo. Without unending growth, predicated upon finding ever increasing amounts of cheap fossil fuels, the fractional reserve banking system is doomed.
The only question is whether it will die a quick death or will the PTB drag it out.
3 On June 1, 2006 at 10:01 AM, Daniel wrote —
Jimi,
What I find so amazing is the fact that the administration continues to tout the robust economy but it just hasn't translated into anything meaningful for most Americans.
I agree with your final remark although there are times when I worry that we are all becoming more hardened and less willing to lend a hand.
Always good to hear from you!
Daniel
4 On June 1, 2006 at 10:07 AM, Daniel wrote —
Brisa,
Thank you for your insightful comments. I try to avoid being an alarmist but many of the indicators seem to paint a troubling picture.
I hope to hear more of your thoughts.
Daniel
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