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Commentary: There's an economic slowdown coming
By Dr. Irwin Kellner, MarketWatch
Last Update: 10:29 AM ET June 21, 2005
HEMPSTEAD, N.Y. (MarketWatch) -- Those who think that economic growth in the second half of this year will be as strong as it was in the first half are looking out the rear window.
Current and forward-looking data tell a different story.
With ten days to go, it appears that the U.S. economy grew at an annual rate of about 3 percent in the second quarter. This is only slightly less than the 3.5 percent clip of the first.
More important, however, is the outlook for the rest of the year.
As usual, the pundits are divided. Some think the economy will continue to grow at the pace of the past two quarters. Others, including myself, feel that a slowdown is in store, with growth shrinking markedly as the year rolls on.
To be sure, the bullish case is not outlandish. After all, both fiscal and monetary policies are far from restrictive.
The federal funds rate, adjusted for inflation, is positive, but just barely. Using the personal consumption price index less food and energy, today's nominal federal funds rate of 3% translates into a real federal funds rate of 1.4 percent. By contrast, its long-term average -- which is also what many would consider "neutral," -- is 1-1/4 points higher.
As for fiscal policy, what can you say about a budget that's $366 billion in the red over the past 12 months? Even though it's about $100 billion less than at its apogee at the beginning of last year, at nearly 3.5 percent of the gross domestic product, it still represents a lot of stimulus being injected into the economy by Washington.
In spite of this, the expansion is beginning to show signs of fatigue.
The Conference Board's index of leading indicators dropped in May, the fifth straight months without an increase. This index has now declined at an annual rate of 2.2 percent over the last half-year -- putting it in a range that in the past has presaged a recession.
About half the decline in this index over the past year has been due to a flattening of the yield curve. Some pundits downplay its importance as a leading indicator.
Those who do overlook the fact that, the flatter the yield curve, the less incentive banks have to lend. Once the curve inverts, bank lending shuts down and the economy goes into a recession.
But the bearish case rests on more than just the yield curve. Consumers have been hurt by this year's jump in energy prices, weak growth in personal incomes and high debt loads, which are becoming more problematic with each hike in short-term interest rates by the Fed.
Don't look to business to take up the slack. The rise in the dollar is hurting exports. Many firms are also trying to whittle down excess inventories, while their need for new plants and equipment was largely satisfied by last year's spending spree.
To top it off, money growth is shrinking, the stock market is flat, and prices of basic commodities are falling. Not a pretty sight for those of us who look ahead.
Rear window
Commentary: There's an economic slowdown coming
By Dr. Irwin Kellner, MarketWatch
Last Update: 10:29 AM ET June 21, 2005
HEMPSTEAD, N.Y. (MarketWatch) -- Those who think that economic growth in the second half of this year will be as strong as it was in the first half are looking out the rear window.
Current and forward-looking data tell a different story.
With ten days to go, it appears that the U.S. economy grew at an annual rate of about 3 percent in the second quarter. This is only slightly less than the 3.5 percent clip of the first.
More important, however, is the outlook for the rest of the year.
As usual, the pundits are divided. Some think the economy will continue to grow at the pace of the past two quarters. Others, including myself, feel that a slowdown is in store, with growth shrinking markedly as the year rolls on.
To be sure, the bullish case is not outlandish. After all, both fiscal and monetary policies are far from restrictive.
The federal funds rate, adjusted for inflation, is positive, but just barely. Using the personal consumption price index less food and energy, today's nominal federal funds rate of 3% translates into a real federal funds rate of 1.4 percent. By contrast, its long-term average -- which is also what many would consider "neutral," -- is 1-1/4 points higher.
As for fiscal policy, what can you say about a budget that's $366 billion in the red over the past 12 months? Even though it's about $100 billion less than at its apogee at the beginning of last year, at nearly 3.5 percent of the gross domestic product, it still represents a lot of stimulus being injected into the economy by Washington.
In spite of this, the expansion is beginning to show signs of fatigue.
The Conference Board's index of leading indicators dropped in May, the fifth straight months without an increase. This index has now declined at an annual rate of 2.2 percent over the last half-year -- putting it in a range that in the past has presaged a recession.
About half the decline in this index over the past year has been due to a flattening of the yield curve. Some pundits downplay its importance as a leading indicator.
Those who do overlook the fact that, the flatter the yield curve, the less incentive banks have to lend. Once the curve inverts, bank lending shuts down and the economy goes into a recession.
But the bearish case rests on more than just the yield curve. Consumers have been hurt by this year's jump in energy prices, weak growth in personal incomes and high debt loads, which are becoming more problematic with each hike in short-term interest rates by the Fed.
Don't look to business to take up the slack. The rise in the dollar is hurting exports. Many firms are also trying to whittle down excess inventories, while their need for new plants and equipment was largely satisfied by last year's spending spree.
To top it off, money growth is shrinking, the stock market is flat, and prices of basic commodities are falling. Not a pretty sight for those of us who look ahead.
