Ecomentary.com provides this archive of postings dating from 2011 dating back to 2001, as a resource. Due to the nature of dated material on the internet, we do not guarantee that hyperlinks are current.
June 25, 2009
Managerial Capitalism in Default Notes on the Presentation The Panic of 2008 with hyperlink more…
June 23, 2009
The Panic of 2008: Managerial Capitalsim in Default This is a presentation used as the basis of our “outlook” remarks at the Westeran Economic Association meetings in Vancouver, B.C. June 30, 2009 more…
March 24, 2009
Play Ball: The Real Season Is About to Begin The Administration’s plan to “bail in” private sector investors by offering them incentives and guarantees to remove toxic assets from the banks is about to unveiled. It will differ from the Paulsen strategy only in that it will have to hide the true costs. It must involve at least two ‘hidden ball tricks.’ The Real Season is about to begin more…
February 17, 2009
Down the Hayek Road Watching the hearings last week of the House Financial Services Committee was deeply depressing. While we recognize that this is a “show,” and not a serious deliberation into needed remedies for our banking crisis, it is hard to reconcile the need of legislators to parade in front of their constituents and our need for them to legislate wisely. Bank executives make good prey. In the best of times, one is always uneasy at the power a banker has over one’s business. In the worst of times, banks are even more suspicious of potential borrowers. They are in the intermediation business, caught between borrowing short and lending long and asymmetric risk is the environment in which they grant credit. Nothing new here, but in a recession, credit-worthy borrowers are also fewer in number. We want our banks to take more risk. Is the best way to do that putting them on display and forcing them into public confession? It would appear we are on the way to some form of “nationalization” in which the role of the Congress could become even more dangerous. We are marching very quickly down the Hayek Road! more…
October 03, 2008
Monetary Politics The Credit Crisis has created “new turf” for the Fed. In exercising authority on new turf, the Fed has become a much more political institution. The politics of money could become very dangerous to the Fed’s independence. Money is power and Congress and the White House are unlikely to allow the Fed’s appointed officials to act without new fetters of some sort. When this crisis is over, it is highly unlikely that the Fed will be the same independent instituiton that we used to know. It happened to the BOE. It will happen here.Money is just too important to be left to unelected officials…at least in the eyes of those that got to Washington by the rough and tumble of winning elections. hustings! more…
September 18, 2007
Making an Omelet: the Bernanke Recipe Book The FOMC’s decision today will undoubtedly reflect many different opinions, all subsumed into a single statement. Our best estimate is that there will be a 25 basis point cut in the FF target, a cut in the discount rate that could well exceed 25 basis points (perhaps as much as a 50 basis point cut and a clearer indication that the Fed’s focus has turned to offsetting the impact of tighter credit and lower housing prices. It will be an omelet, mixed and scrambled ingredients, beaten into a single dish. The market’s problem will be to disentangle the ingredients that led to the decision and that will not be an easy task, even if the desire for transparency by this Chairman is quite high. Whatever the decision, it will mix forecasts, reactions of economic agents to perceived risks, and not least, a congealed assessment of risks by the FOMC members. We can characterize the outcome with a scenario analysis that highlights the complexity. It may not lead to a clear market perception of what the Fed has in mind going forward. more…
December 12, 2006
The Two-Handed Fed Market players like to read the Fed’s hand and then make their bets as to future policy actions What happens if the Fed has two hands? The next level of analysis is to figure out what the Fed knows…for sure. Let us know when you get the answer! more…
September 20, 2006
A Patient and Passive Fed The FOMC stood pat today with language that allows further tightening, if the circumstances dictated such a posture, or possibly easing at some distant time in the future. One could read some ambiguity into today’s statement because while inflationary risks continue to exist, housing is clearly exercising a drag on the economy. We see no reason to think that ease is imminent and that given the run of the data so far, the Fed is likely to stay the patient course it has chosen. more…
August 06, 2006
Current Data and Past Minutes Suggest the FOMC Will Pause on August 8th This FOMC meeting appears ready to mark a turning point in its policy course. After 17 straight increases in the Federal Funds target rate, we believe the FOMC will pause this time. more…
March 29, 2006
Bernanke’s First Meeting Illuminates But Does Not Surprise The FOMC statement issued yesterday contained more possibilities than is usual in a post meeting statement. Some will see this as increased transparency, but the statement also allows for quite distinctly different outcomes. The FOMC raised the bar (25 basis points was expected)and indicated that it will be watchful for signs that it must raise it further. At the same time, it has not really committed to further increases, unless the data compels it to do just that. Watch and measure the Navigator said earlier this month! more…
March 22, 2006
Bernanke’s Conundrum The recent speech at the New York Economics Club (3/20/06) by Fed Chairman Ben Bernanke provided a sharp contrast to speeches to that group by his predecessor. Bernanke gave a lucid, but technical expose of varying interpretations of the yield curve and the subtle implications for monetary policy that different interpretations of the yield curve provide. This introduces even more ambiguity into future behavior of the Fed, in spite of this Chairman’s professed desire for more transparency and a more rule-bound direction for Fed policy. We think this was not an accidental twist, but a first public step in creating a new consensus at the FOMC. more…
January 26, 2006
Crude Oil Bubble Popping? Among the many bubbles allegedly created by aggressive monetary policy, oil got a lot of attention. However, contango and warm weather have led to a massive inventory build. That suggests that crude oil in the short run might be vulnerable to a correction. Further, financial interests might not be willing to take the implied losses from their commodity positions. An interesting test may be coming in which the old maxim that markets behave so as to inflict the maximum pain on the most individuals may get tested. more…
November 23, 2005
What the FOMC Minutes Reveal Insiders have long talked about the need for a change in the policy statement, but have generally thought that the policy settings were “steady as she goes.” That view may now be subject to change as the market mulls over the Minutes from the last FOMC meeting. In fact, it opens up the possibility that the “measured pace” doctrine is now subject to revision and that market yield curve forecasts will be revised more…
September 20, 2005
Fed Focus is on Preventing Inflation Katrina was a horrible disaster and the FOMC statement took time to recognize the tragedy and the potential influences on the economy. The real story, however, was the FOMC’s focus on preventing inflation. This was not the time to take a “pause that refreshes.” This was the time to signal markets that the Fed is resolute in its self defined task more…
July 20, 2005
Greenspan on the Hill: the dog that didn’t bark Chairman Greenspan went to the House today (perhaps for the last time for the mid year report on Monetary Policy). Theformal report contained implicit hints that inflationary risks were still possible and that monetary policy might well have to be tightened further than market observers had thought in order to counteract such possible outcomes, the House Committee members virtually ignored these hints. In fact, the implicit threat of further inflation was a dog that didn’t bark more…
May 03, 2005
The Couda Wouda Shouda Bet This is a gambling age, if for no other reason than volatility is very low. Low Vol, as they say, makes it necessary to push the envelope in order to achieve the absolute return standards of our time…apparently, even for Central Bankers more…
January 28, 2005
?It ain?t over until it?s over? The estimable Yogi Berra, who gets more citations than Warren Buffet in Bartlett’s Quotations gave utterance to a profound thought on markets. Little did he know that it has stood such a test of time more…
October 16, 2004
STAGFLATION ON THE HORIZON? The rapid rise in oil prices and the continued degree of current monetary ease has suggested to some analysts a striking parallel to the Stagflation of the 1970’s. We think that focusing on the differences between now and then will lead to more productive insights. Our view was published by the Financial Times on October 15th. more…
September 23, 2004
Claims Rise More than Expected Initial claims rising to 350K (compared to an expected 335K), a data point that appears to be consistent with the ?new wave of deflation? thinking that is spreading throughout the bond and equity markets. We would caution against drawing any firm conclusions on a weekly data bit, particularly after the hurricane week reading. more…
August 13, 2004
The Wages of Monetary Sin One accusation thrown at the Fed in the Greenspan era is its apparent willingness to feed the Lions of Wall Street when they roar for more meat. When equity markets sink, the Lions roar, calling for easier money. more…
August 03, 2004
Soft Spot, Hard Spot: which is it? The component indices of the ISM tell an interesting story. Production and new orders accelerated while export orders were at nearly the same pace of expansion as in the prior month. Backlog orders fell and supplier delivery times improved. But, if this Presidential election is all about jobs, there is a continued suggestion that jobs at least in the key, manufacturing sector are not going to grow as rapidly as the Republican Party might like. more…
July 21, 2004
Greenspan on the Hill: for whom has the bell tolled? The mid-year appearance of the Chairman signaled a new tack on the current sailboat of monetary policy. The winds of inflation may yet be off the port bow and the Chairman took up the pennant of all central bankers: inflation (at least in the long run) is a monetary phenomenon. But many questions remain more…
June 29, 2004
Getting behind ‘Behind the Curve’ With the most likely outcome of the FOMC?s deliberations tomorrow a 25 basis point rise (the overly uniform consensus), economist jabber in the past few days has focused on whether the Fed is ?behind the curve.? The phrase itself is misleading, because the alleged curve behind which the Fed is sometimes accused of lurking involves two very different kinds of perceptual issues. more…
June 12, 2004
Fear and Greed: Bond Market Rallies on CPI Relief It seems that the sell-off in the bond market in recent days was overdone and the less alarming CPI report caused a very rapid ?shock? retracement. Equity markets should respond similarly, leaving the underlying issue of the pace of normalization of the Fed Funds rate to addressed by the Fed. more…
May 31, 2004
Where are we going, if anywhere?
This is the week when the true direction of economic policy may emerge. Tomorrow, we get construction spending and the ISM
more…
May 19, 2004
Monetary Commentary The real issue that is beginning to emerge is whether the Fed will be surprised by the data between now and June 30th. more…
May 13, 2004
Fed Dilemma: who’s crying now? The data are pointing to an old familiar refrain? Who’s crying now? Can the Fed resolve rising prices and bond trader expectations? We’ll know in a bit more than a month more…
May 12, 2004
Equities and Bonds: who moved my cheese? The question for traders and investors today is ?who moved my cheese?? Are equities in the drivers seat? more…
May 07, 2004
As it turns out Monster was a good indicator Monster.com gave the right signal and the payroll number surged again to 288K after the 308K for last month. And for the Bond Market, what does this suggest? more…
May 07, 2004
Initial Claims and Monster.com Suggest Improved Payrolls The economy is beginning to find those “missing jobs,” or so it now appears. more…
May 04, 2004
Fed Forecast The markets have been rumbling with fear that the Fed will replicate its interest rate step ladder of 1994/1995.
Today, the Fed must communicate in earnest. more…
April 16, 2004
Data Review: Claims, NY Empire Survey, Philly Fed As the ship turns slowly in the wind, a picture of a sharply recovering economy is emerging more…
April 16, 2004
Market Pivots: Geopolitics vs Monetary Politics While earnings reports continue to impact individual stocks, in our view, the overall market conditions (behavior toward risk, valuation parameters, etc.) are now highly sensitized to geopolitical (and domestic political) risks and the likely future course of monetary actions by the Fed. more…
January 28, 2004
FEDSHOCK: patience in, considerable period out There will be many questions asked as to “why now” and “on what basis?”
But, this is an unusual time and Greenspan is an unusual man to say the
least. He has been accused of being a “serial bubble-blower” by some.
Maybe Chairman G needed some room and it was time to tell the Market that
“nothing is forever!” Whatever led the Chairman to write a statement with
such a change, he now has the room he prefers. more…
January 22, 2004
Euro Wreckage
The doubts about the EU are growing despite the ascension of the Euro. Now, one of the major investment bank analysts, a European, has thrown down the gauntlet and proclaimed the Euro and its parent, the EMU a huge wreck. The fallacy of EMU was that it was supposed to occur as part of a top down process that created the necessary factor and product market flexibility necessary to sustain an Optimum Currency Area. That never happened, but EU policy operates as if it did. How long can the contradiction of a weak internal economy and an (overly) strong currency persist?
more…
January 11, 2004
Head’s Up on 2004 The issue agenda for 2004 seems focused on the peculiarities of this recovery and how markets have reacted to this somewhat unusual set of circumstances. Domestically, financial markets are flooded with liquidity that contributed to very lucrative returns in equities, bonds and for those who sold the dollar forward. However satisfying that was to those with the “Right Stuff,” until the Missing Jobs show up, abundant liquidity will remain. Domestically that has boosed equity prices in the first weeks of the new year and internationally the dollar’s weakness threatens to break out into a New International Monetary fix. more…
January 08, 2004
It’s baaaaaack Market forecasts for 2003, made in many ‘end of the year’ reviews frequently focused on the high probabilities of single digit returns and stocks with low volatility. As it turned out, it was just the opposite more…
December 16, 2003
Industrial Production Increases with Consumer Price Quiescence Small Minds should not bother with consistency in economic data series, especially with a recovery like the current one. Yet, some ‘expectations’ were fulfilled with the strong performance of Industrial Production and weak price inflation data. Consider the “considerable period” doctrine, once more, and the possibilities that QI2004 corporate profits could be better than expected more…
December 16, 2003
Housing Starts and Permits Yield Conflicting Signals The Housing Starts number was a ?blowout?, posting the highest single month total in the data series since 1984, and pulling up the 3-month average accordingly. However, building permits dropped, signaling a potential reduction in the Starts numbers going forward. more…
December 12, 2003
UMICH Consumer Confidence Data Slips Consumer confidence surveys are usually interpreted in light of current consumer attitudes—rather than as forecasts for forward purchasing plans. In that sense, the preliminary UMICH survey data tell us to be cautious. What it may be saying more than anything else is that the consumer wants to be sure that his personal income—and in particular, his wage income—is going to be there going forward more…
December 11, 2003
Changing Winds for 2004? While initial claims data the past two weeks have ? worsened,? we suspect nothing ?real? is changing other than
the weather, the Thanksgiving holiday, and the very gradually shifting economy. In other words, ?noise?
prevents the real, long-term trends from emerging steadily on a week-by-week basis. We would, of course, be
happier if the 4-week average claims continued its descent in an uninterrupted manner, but it has not. Longer term, continuing claims have not yet been perturbed from their recent path of improvement. more…
December 09, 2003
Monetary Tea Leaves or Rules versus Discretion The FOMC met today and left the ?considerable period? doctrine in tact?or did it? There were several notable shifts in the semantics of today?s statement, arguably allowing market participants to put their own spin on the state of monetary policy. Critics of ambiguity will have a rich diet to digest, while Greenspan idolaters, who wish to give the ?man who? plenty of leeway in determining the timing of a shift of monetary policy will be pleased. On balance, for those of us more inclined to ?rules? over ?discretion,? it was a step backward. more…
November 27, 2003
Will the Real Recovery Please Stand Up! The Missing Person at this party has been New Jobs. Without a steady and substantial improvement in payrolls, neither policy makers nor business will feel truly comfortable, in spite of clear indications that the economy is improving. Corporate profits have been hitting new records, but only now does the likelihood of much better payroll growth seem within reach. The Fed has been extremely accommodative and the tax cuts have clearly stimulated consumer spending. The latest data seem to be showing that a fully elaborated recovery is now well underway. The upside possibilities for a better than expected QIV exist as well as a healthy expansion continuing into 2004. Investors have already written up equity values. In order for equity markets to improve substantially, some upside surprises are probably required. more…
November 19, 2003
Housing Blows Out Again The businessman was suspicious during most of the recovery upswing which was powered by far more optimistic consumers. Ultimately, they put their money where it counted, buying durables. more…
October 24, 2003
Small Rise in Continuing Claims A small rise in Continuing Claims and little change in Initial Claims fails to offset the larger context of falling Continuing Claims. TWe see this as a barometer of an improving labor market going forward. more…
October 17, 2003
Look Ma! No Hands The recent run of data is painting an improving picture of the economy, one that gives optimists heart that the ?turn? has finally begun. With all the focus on Jobs Jobs Jobs, pessimists will wait for hard evidence that hiring levels are really rising and that some of the lost millions are going back on the payroll. It has been our view that the tension point was the clear boost to consumer spending provided by the tax cuts as against the very low rate of job creation. In point of fact, the recent study by the BLS clearly indicates that what kills the employment data are the absence of new jobs, not the layoff pattern that is characteristic of nearly all recessions. We have always felt that the consumer would ?hang tough.? Ultimately, the real pessimists—none other that the managers of Corporate America who were battered by falling corporate profits, dwindling personal stock portfolios, enough ?bad apples? in the corporate governance world to make a very sour barrel of apple sauce, and the ?China Syndrome?—would come around. more…
September 17, 2003
Deficits Matter but to whom? We know it is the political season as the rant about the deficit rises by the decibel. Despite our science, economics cannot predict, without endless equivocation, the size of the deficit, even for 2004, much less the size of the cumulative deficit for the next 10 years. The bell is tolling incessantly over the impending disasters that will befall the economy as the Deficit Marches on, growing without suitable restraint. In fact, there is more than a single bell tolling the collapse of the Republic because growth in the deficit of the size some economists now project will surely eat all of our lunches. more…
August 12, 2003
The Maestro’s Malapropisms: consistency needed this time Fallibility is the curse of all who prognosticate, yet sometimes one is amazed by the hat tricks that some policy makers can perform. Last night, when this piece was written, we found it difficult to imagine the language that the FOMC would use to thread the needle between commitment and discretion. Somehow, however, Greenspan found the path through the thicket, despite our prior foreboding. For the record, we post our mea culpa for doubting he could perform such delicate guidance. more…
July 17, 2003
Greenspan and the Monetary Report For two days, Greenspan walked the Congress through the economy’s tepid recovery (to date) and his modified optimism that prospects were improving. In his remarks to the House, he caused a substantial gyration in the Bond Market which he tried to repair with his comments on Wednesday to the Senate Banking Committee. The Senators were more graceful, but the Bond Market was jumping up and down all day. The Fed has not put on a convincing case either that the economy is truly on the mend or that it speaks with one mind on policy going forward. If one listened intently to the two days of Q&A, one could make a case that anything is still possible…
We think it is unclear that the Fed is finished its work for this recovery. The door to further easing seemed to close on Tuesday and was re-opened on Wednesday as the Chairman watched the Bond Market Boogie. more…
July 15, 2003
Speculating on the Greenspan Speculations In attempting to forecast the direction of the Chairman?s midyear testimony to the Congress, one should remember the old quip about Greenspan, to wit: ?If you are understanding what I am saying, I must be speaking too clearly!? The Chairman will have to wiggle a bit more than usual trying to reconcile the intense fascination with Deflation and the Bond Market’s recent disappointment with the FOMC’s last rate reduction. The real issue is time inconsistency which will could show just how nimble tongued the Chairman can be if the Congress alertly presses the issue. more…
July 14, 2003
Bastille Day on the Foreign Exchanges? There is a growing ‘chatter’ concerning the “imbalances” of the American economy (large current account deficit;large government deficit; and “insufficient savings”). Many problems or one problem? The other side of this coin is the ‘fear’ that one day foreign dollar holders will storm the foreign exchanges and take the dollar down. Bastille Day on the Foreign Exchanges? Hardly! more…
June 25, 2003
Dr. Greenspan and the ‘Classics’ What issues were hidden beneath the 25 basis point reduction and the markedly different language of the FOMC’s Statement? What has really been learned from the Japan experience? Has the Carry Trade been given a warning? more…
June 25, 2003
The Monetary Policy Dilemma The consensus on the FOMC’s likely actions today has jumped around over the past few weeks as the economic data and the bond and equity markets have rolled. Coming down to the wire, a 25 basis point cut was the most likely outcome, but there were many economists arguing for a 50 basis point cut. Our view was a 25 basis point cut, but we thought that size of the rate cut was much less important than the Fed’s vision of the economy’s real problems and its capabilities in dealing with those problems more…
June 14, 2003
Consumer Confidence Disappoints The University of Michigan preliminary survey data for June weakened from the May numbers. Since the consumer is the last redoubt of the Fed’s recovery strategy, even mild hesitation sets off concerns that the FOMC will have to charge further down its course of yield crushing. A Full Monty on June 25th? more…
May 27, 2003
The Paradox of Profligacy Many economists have recently despaired that the threat of deflation is beyond the power of a Central Bank to address, or to put it differently, that while inflation is fundamentally a monetary matter, deflation is not. The hinge is the stability of velocity. But, just as in the great hyperinflationary experiences, the public’s expectations—-particularly expectations about central banking behavior and its impact on prices—does count. The key is to avoid creating a substantial amount of risk aversion and the fear that the Central Bank will in fact back-off from its duty to create stable prices and maximum employment. more…
March 17, 2003
The Post Attack Environment The equity market has reacted strongly to the upside in apparent reaction to the ‘end of uncertainty’ that followed from the Azores declaration. The clock is now ticking to the first gunshot, but when the bell rings, and the fighting commences, more uncertainties will appear. A small respite has created a big rally, but the geopolitical clouds will still be there, even if in a different form. more…
November 07, 2002
Greenspan plays Offense and Defense The market had discounted a 25 basis point cut and the Chairman reversed field with 50. To private clients, we had made the 50 point cut a 50-50 proposition, but the most interesting side of this move is the change in the bias to balanced. more…
November 05, 2002
The Pivots of 2003 Divergent growth scenarios for QIV 2002 highlight forecasts for the economy. To a larger extent than normal, political events dominate economic events at least for the next few quarters. Forecasting economics is at best chancy. Forecasting politics should be left to prophets and magicians. The Fed has to be a bit of both and will cut rates tomorrow. We are evenly divided between 25 and 50 more…
August 13, 2002
Stormy Weather but no leaks in the boat…so far The FOMC changed tack but not its basic course, despite explict recognition that stormy weather is buffeting the boat. Where does that leave monetary policy going forward? more…
August 09, 2002
Hang together or all hang separately At the present time, absent the data from Advance Retail Sales due Tuesday, the most likely outcome will be that the FOMC will issue a stronger statement that could include some commitment to move quickly in the event further evidence of an economic stall is developing. That could be a workable compromise between the fear of a failed recovery scenario and traditional central banking practice. We would rate the odds at 60% for this kind of outcome. more…
July 06, 2002
The Irrelevance of Macro The continuing divergence (“disconnect”) between the evidence of economic recovery and the persistence of a huge decline in equity values led us to write a speculative piece. While we explore the underlying themes of the disconnect designed for day trading, it seemed that some interesting day-trading themes could emerge prior to and following the July 4th holiday. more…
June 14, 2002
Slower Growth in Q2 This morning?s data provides a metric on the degree of disappointment with earlier optimism as to the sustainability of economic growth in the early phases of recovery. The lot of economic forecasters is a dismal one indeed more…
June 12, 2002
What is Wrong on Wall Street Today’s Richmond Fed survey confirms what all of us now recognize: Q2 growth is slowing and Q2 is going to be a much different affair than Q1. One issue to focus on is whether Q2 will be a good barometer for 2H02. more…
May 20, 2002
The Double Dip Deja Do The ‘double-dippers’ are doing it again, worried about a stall in the U.S. economy. Double-dipping is not where your attention should be focused. Focus on valuation, while you recite the famous utterance of Yogi Berra: “A nickel ain’t worth a dime anymore.” more…
May 13, 2002
Good News is Bad News The economy gets better, but the equity markets gets substantially worse? Why the disconnect? Market suspicions are that investment demand will not revive,and growth will remain unbalanced. The Fed is clearly still worried about the economy’s “balance” even though they recognize that monetary policy is very ‘accommodative.”Paradoxically, when the Fed finally raises rates, the equity market is likely to move up. more…
May 11, 2002
Quick Pics on Recovery Real earnings took a sharp decline of 0.6% last month continuing the pattern of increased volatility that has occurred since last year when the economy nosedived. It is unclear how to interpret the most recent data although we know that nominal wage growth has slowed quite sharply more…
January 28, 2002
December Total Home Sales driven upward by Sales of New Homes Cheap money, particularly for mortgages, has blunted this recession, much in the same fashion as booming auto sales. Sooner or later, consumer balance sheets do get stretched even though debt service falls with lower rates. How long can this dance last? The Fed has seen enough data to back away from further easing at this point, but they are still waiting for hard evidence that business spending will improve—beyond replacement of inventories. The Fed won’t cut on Wednesday, but they are still ‘twixt and between.’ This probably means the bias toward weakness remains even if for now, they do not reduce the Federal Funds rate. This will give Fedwatchers more to comment upon as Greenspan modulates once more in front of the ‘liquidation’ dilemma. How strong can the recovery be if wallets are emptied now? more…
January 28, 2002
December Total Home Sales Higher but Fed Dilemma Continues Capping a record year, New Home Sales of one family homes rose to 935,000. This drove total sales (existing plus new)to a record rate of 6,125,000. The Fed has to hope that the consumer continues to spend for homes and autos until business spending improves. Greenspan’s ‘restatement’ doused hopes of a further cut at this, next FOMC meeting, but the Fed still is ‘twixt and between.’ FOMC will leave the bias tilted toward weakness, but will not cut further at least at this meeting. more…
December 26, 2001
Year End Review: What to look for in 2002
- The U.S. will be the main driver for global growth in 2002, but the
recovery will be weaker in the first half than in the second half. - The U.S. economy will bottom out in QI2002, but the return to high growth levels of 1997-1999 will be restrained by consumer ‘retrenchment’ as
consumers seek to raise their savings rates and moderate the rate of growth
of consumer debt. - The ‘inventory cycle’ that has been a major depressant to growth in 2001 will reverse in QI2002-that is the ‘rate of decrease’ will be lower
than in IV2001 and therefore ‘growth positive.’ That will give some impetus
for growth in QI-QII 2002, but longer term, private domestic fixed
investment must revive to produce more enduring growth. - Already scheduled tax reductions for 2002 will provide some offset to
consumer attempts to save more. - Even with lower rates of growth to consumer expenditures, QI2002’s ‘inventory rebound’ should provide some leveling off in the fall in Industrial Production and eventually, its gradual rise.
- The Fed will return to a neutral bias sometime in QI2002,but will not be pressed to raise its Federal Funds target until QII or QIII 2002. The yield curve will flatten as short rates rise modestly. The Fed will have to face a substantial task of “reeling in” because the growth rates of various monetary aggregates are too high to achieve reasonable price level stability.
- The trajectory of GDP growth in 2002 will be upward, but we are doubtful that the US will achieve a sharp “V” recovery in FH2002
- By 2003, real GDP will grow at close to the ‘new’ trend growth of
3.25-3.5%, but the composition of demand will show a smaller ratio of fixed
private investment to GDP, a higher personal savings rate and a larger ratio
of Government expenditures to GDP. This suggests that rate of growth of
productivity will be lower than the ‘boom’ period. - Fed Watching will take on a new dimension, as the Fed begins to
‘reel-in.’ How much and how fast will be the watchwords for QII/QIII 2002. more…