Michael Gregory
Michael Gregory
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We're seeing signs that consumers are starting to feel the impact of persistently high gas prices. As prices stay high we're going to see the impact broaden from discount to more mainstream retailers.
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Is there a risk the Fed has tightened too much? Not with the kind of momentum we're seeing in the economy and not with consumer confidence at record highs. People are wealthier, real incomes are growing, the housing market, while slower, is still super strong and the labor market is still super tight. I don't think the Fed is finished just yet.
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Despite the fact that energy prices are creeping up and housing continues to crumble, surveys suggest job gains are providing an offset for confidence. The potential is there for consumer spending to remain resilient.
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Consumers may be wobbly, owing to high energy prices, a vulnerable housing sector and increasingly uncertain medical and pension benefits, but there is nothing like the whiff of solid job growth to keep them on their feet.
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It's only a matter of time though before the consumer succumbs to weakening housing and higher gas prices, and I think we'll see that by the third quarter.
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There is a lot of momentum in this economy. Consumer spending is continuing to march along, business spending is solid and you have a pick up in foreign demand.
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Mortgage equity withdrawal (which keys off prices and rates) is going to ebb substantially and pull consumer spending growth down along with it. When it does, the Fed will pause.
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I think a lot of people's perceptions are still affected by the bubble years. If you take away that four-year period when the unemployment rate was lower, you have to go back some 32 years to find an unemployment rate lower than it is right now.
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People are infatuated with candles, they're using them more than ever,
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Over the past several weeks we've moved from pricing in one further move by the Fed to odds favoring two moves.
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Our last two fires had smoke detectors, but no batteries, ... We're praying to get the word out (about smoke alarms).
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With business outlays solid and foreign demand picking up, this will likely keep the Fed in the tightening game through the first half of the year.
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The question for the Fed is what inflation will look like in 12 to 18 months. The U.S. economy is still growing fast enough to use up slack that's out there in the economy, and that could present an inflation threat down the road.
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There is no question that the economy is slowing, but it's not exactly shrinking, either, ... We are seeing the first tentative signs of slowing, but you have to remember that we are starting at a very high base of growth. The Fed will still err on the side of caution and restraint.