Ethan Harris
Ethan Harris
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In total, we learned very little about the future of the economy or Fed policy except that the Fed is not ready to hike rates in the very near future.
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Obviously we have a pretty weak economy and this was not unexpected. We knew they were going to have to revise it downward.
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Are the economic indicators looking like a recession? Absolutely. But you can still hold out hope that the war is resolved in a month or so and the economy can stage some kind of recovery.
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Coming after the energy shocks and Katrina, it's a remarkable spring-back. The economy seems to have an underlying resilience.
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It is gradual step towards a little more flexibility. Inflation, the economy and the markets will dictate how much further they go. They say the economy is strong and that inflation risks are tilted a little to the upside. There is nothing yet in the data that will stop the Fed.
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The indicator that economists use to predict the housing market is the affordability index -- the ratio of monthly income to monthly mortgage payments. As the economy picks up, the typical family's monthly income will slowly accelerate, but the monthly mortgage cost is quickly jumping, much faster than income could possibly move.
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I think the economy is already in the process of slowing to a more moderate pace. Oil has both an immediate impact on spending and lagging impacts. Even though oil has stabilized in recent weeks, we still have to play out effects. We're still waiting for the shock value of the winter heating bills hitting people.
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But the obvious effect is on utility consumption, which will affect industrial output in the economy. People consume more electricity, that places more demand on natural gas, coal, power, and electrical systems.
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The one thing that companies can do quickly without laying people off is reduce the number of hours per week; as the economy slows, that's the natural place for a company to cut back. It's a little harder to pull back quickly on job hiring.
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The economy is one ugly event away from contraction.
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The national economy usually weathers these storms with relatively minor damage. Second, the hurricane is a 'supply shock' -- a disruption to productive potential -- not a 'demand shock.' The same factors that threaten growth -- higher commodity prices, shipping bottlenecks, reduced local productive capacity -- also threaten inflation.
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This is a sector that should be one of the engines of growth and should keep the economy healthy in the face of the weakening housing market.
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You're not talking about a full-blown business-cycle recovery here, which is something like 6 percent GDP growth for a year. To get that, you'll need the whole economy operating in full-growth mode, and clearly the consumer isn't.
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The main thing holding back the economy in the past year and a half has been a lack of business confidence, and now we're seeing these surveys with a fairly optimistic take on the economy. The non-manufacturing survey certainly reflects the general increase in confidence, and that's a self-fulfilling thing.