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How Low Can You Go?
Dear American Capitalist Reader,
Today we received the last bits of economic data before the holidays and they provided some good insights into the crosscurrents that presently exist within the economy. They come on top of news that third-quarter GDP growth, initially 1.7%, revised up to 2.2%, and now back to 1.9%.
The information amply illustrates a slowing economy, although not uniformly and not without pockets of growth. Durable goods orders jumped 1.9%, although if you take out transportations it was down 1.1% - confirming the weaker manufacturing numbers we have been seeing for a few months now.
At the same time, personal consumption expenditure price index was virtually flat, reinforcing the image that we are seeing a gradually slowing economy. In short, a picture-perfect monetary squeeze, with sector distortions and the odd bit of contradictory data. In fact, the ONLY difference between this slowdown and most others is the absence of high inflation. One of the abiding surprises of this fall has been the rapid reduction in consumer inflation pressures in light of what has been to date a relatively benign economic slowdown.
And in spite of the spike in producer prices last week, there is still very little sign that higher wholesale prices are making their way to consumers. An imperfect but illustrative experience at Best Buy yesterday gives you a sense of what is going on – a flat-panel TV we have been eyeing is now a full 40% cheaper than it was in the summertime. The competition for consumer electronics is staggering. Indeed, Circuit City’s earnings warning last week was due almost entirely to heavy discounting, while we count no less than five major retailers – WalMart, Target, Kohls, Sears and Home Depot – who have dropped prices on the majority of their products between last year and this one. The deflationary effects of Asian and Latin American imports are alive and well.
The bond market has read this for what it means and stayed long, implying the inflation risks are to the downside and keeping the yield curve inverted. Granted, the folks in the bond pits are famous for seeing ghosts where there are none, so things could change. But for right now, all indications are that we are entering a soft-landing, slow-economy phase with core inflation well contained.
Perhaps the question for 2007 is not whether the Fed will ease, but how low it will go.
Wishing you the best of holiday seasons,
Steven Lord, Editor, Trend Investor
P.S. Due to the holiday season, American Capitalist will not be sent out next week.
