Economy Slows Sharply, Inflation Heats Up

[EJ]

Economy Slows Sharply, Inflation Heats Up
Friday July 28, 2006 (Jeannine Aversa - AP Economics)

Economy Slows Sharply, Inflation Heats Up in 2nd Quarter, Commerce Department Says

The economy's growth in the second quarter was less than half that of the prior three months as consumers tightened their belts and spending on home building nose-dived. Inflation, however, shot up.

The latest snapshot released by the Commerce Department on Friday showed that that gross domestic product grew at an annual rate of just 2.5 percent in the April-to-June period. That marked a big slowdown from the January-to-March quarter, when the economy zipped along at a 5.6 percent annual rate, the fastest in 2 1/2 years.

Even though the economy cooled in the second quarter, inflation heated up.

An inflation gauge closely watched by the Federal Reserve showed that core prices -- excluding food and energy -- jumped at a 2.9 percent annual rate in the second quarter -- far outside the Fed's comfort zone. That was up from a 2.1 percent growth rate in the first quarter and marked the highest inflation reading since the third quarter of 1994, when core inflation rose at a 3.2 percent pace.

Anti-Spin: Stagflation Godzilla (Part I and Part II) has arrived at Wall Street and boys appear confused by what they're seeing. The DOW is up over 90 points on the "slowing economy and rising inflation" news as of this posting at 11AM EDT. This is not the first report of this kind we've seen. The trend appeared firmly in place in Q4 2005, yet Wall Street appears to be in denial. Had breakfast with a very smart guy from Morgan Stanley earlier this week and they like most firms are discounting stagflation. The reason, in my opinion, is the same reason why VCs discounted the dot com bubble in 1999 and many real estate agents even to this day discount a collapsing housing bubble: what are Wall Street guys going to do for a living in a stagflation?

A stagflation is an environment where inverstors look for the least worst investment to reduce their real (inflation-adjusted) wealth losses, and that's a tough sell. You'll still need Wall Street guys, but not so many of them, just as we'll always need VCs and real estate brokers, but not 1.9 licensed real estate brokers for every citizen in California as we have today.

If the financial services and real estate industries were the answers to the collapsed tech industry in 2000, what's the employment answer to waning real estate, financial services and tech industries? Health care, law and government contracting, is my guess. Health care due to the aging population, law due to the heaps of lawsuits that are about to hit due to fraud during the real estate and hedge fund bubbles, and government contracting to rebuild US infrastructure that deteriorated during the previous six year voter tax bribe era, and make more weapons for the many wars the US will be stuck in for years to come. Unfortunately, these all tend to re-enforce inflation.

[nikki]

Re: Economy Slows Sharply, Inflation Heats Up

So, is there a pause in August? The pervasiveness of denial in the markets is amazing to me, but then again, I'm pretty new here. What will it take to make Wall Street not discount stagflation? EJ, the prescience of itulip becomes more obvious with each passing day.

[Alfredo Dominguez]

Re: Economy Slows Sharply, Inflation Heats Up

So, is there a pause in August?

Is there an election in November?

[zmas28]

Re: Economy Slows Sharply, Inflation Heats Up

Amazing to me that with the headlines indicating significantly slower growth & inflation on a continued rise, that the market actually rallied! It must be like EJ says: Wall Street is in denial. Either that, or there is some good news buried deep in the reports some place!
Meanwhile, I was listening to Nouriel Roubini on Bloomberg. He is already forecasting a recession in the US by year end, one likely deeper than the one in 2000-01, which will cause similar problems in global growth including China, because of the trade links.

[nikki]

Re: Economy Slows Sharply, Inflation Heats Up

Is there an election in November?

Yes but there are three meetings between now and Nov, one in Aug, one in Sept and one in late Oct. If they wanted to pander, they should raise now and pause later, closer to the elections. They're going to have to continue raising, IMO, so if there is political pressure, it's only going to get worse as we get closer. If they pause now and incoming data persistently show higher and higher inflation numbers, they'll be forced to raise close to elections in order to have any credibility. But really, all this is likely irrelevant, as the Fed really has no control over what's going to happen, which is the shit hitting the fan.

[Alfredo Dominguez]

Re: Economy Slows Sharply, Inflation Heats Up

Yes but there are three meetings between now and Nov, one in Aug, one in Sept and one in late Oct. If they wanted to pander, they should raise now and pause later, closer to the elections. They're going to have to continue raising, IMO, so if there is political pressure, it's only going to get worse as we get closer. If they pause now and incoming data persistently show higher and higher inflation numbers, they'll be forced to raise close to elections in order to have any credibility. But really, all this is likely irrelevant, as the Fed really has no control over what's going to happen, which is the shit hitting the fan.

Well, I was thinkng about lag effects. I don't think a pause would have any real effect on consumer spending between now and November, which is what is getting nailed because of the housing market decline. The recession is already baked into the cake, so to speak. However, a pause would be good for financial assets, which would make the voting populace less inclined to throw out the incumbents.

[jk]

Re: Economy Slows Sharply, Inflation Heats Up

the markets' spin on the numbers is that the inflation number is old news and that ben said he would pay attention to tightening that was already baked in the cake but hadn't had time to reduce inflation yet. on the other hand the slowing of gdp represented a sharp trend in comparison to the hot Q1 numbers, and would provide a rationale for pausing the rate increases. this, it is theorized, will return us to a goldilocks scenario.

the counter-argument, which folks on this board tend towards, is that further inflationary pressures are baked in the cake and will continue to push up prices, while profits will be squeezed by higher input prices and economic slowing.

you can read it any way you want, really. and the bulls really want to see it as all goooood.