Too strong a number signals a potential problem in the economy
Interview: BNP Paribas---Fabbri, Brian---Economist
>> Welcome back. applications for u.s. mortgages rose for the first time in three weeks sparked by an increase in home purchases as mortgage rates advanced to their highest in more than a year. retailers are gearing up to release same store sales for the month of july expected to report a gain of 3% tomorrow. more on these for what he sees for the economy overall we bring in brian fab roa joining us as chief economist from pnb paribas from their offices in new york. welcome.
>> thank you.
>> what’s your overall view of the economy? you say things look to be brightening a bit. what is out there that points that out to you?
>> a number of indicators. indeed it’s not sippient, but nevertheless it does suggest that the economy is likely to accelerate from first half growth of basically 2% or a little less or something less than 3% in the third quarter. what is confirming confidence to that view, of course, the i.s.m. surveys of both manufacturing and nonmanufacturing are highly―are up strong and high liquorlated with better than 3% growth at their current levels. the factory order statistics seem to suggest that maybe we’ve turned the corner in business investment. admittedly it’s a volatile month to month statistic, but nevertheless we saw a very good jump in june, and it was across all of the industrial sectors from defense to technology to cyclicals. so indeed, we should take some confidence from that. better than 3% is very likely, but 4% is probably still not in the cards yet. the reason for that is basically the lackluster performance, the soft job market that we are currently enduring.
>> there have been a number of people that i’ve spoken to in the last couple of weeks that have kind of downplayed the whole employment situation. what is your sense of how important it is at this point with both the jobless claims as well as the employment number, the number of jobs the economy continues to lose as far as what it means for an extend and real economic recovery.
>> ok. historically or a historical perspective tells us the labor market typically or labor market statistics tend to lag overall other business cycle statistics, and eventually it catches up. and if that’s indeed what’s going to happen this time, then the current set of soft labor market data is not really a hindrance. however, if it doesn’t catch up, it obviously will become a hindrance to further rapid economic growth because if we don’t employ more people then we are not going to have the income and we are not going to then see the spending that would justify business investments. so for the time being we are still at that phase where we are saying it’s soft but it’s lagging the other indicators, if the other indicators pick up, so too, should labor and payroll employment. right now it’s really soft, though.
>> of course, there is a productivity issue in there, one of the numbers alan greenspan has spent a lot of time studying. it’s coming out tomorrow but could be part of a double edge sword.
>> no doubt second quarter productivity gains were tremendous, 2.4% g.d.p. growth. we didn’t have any new job growth. they declined. we had declining hours. therefore productivity gains of three, all the way up, maybe 4% are possible tomorrow. obviously when we have very strong gains in productivity, it’s always a sign that businesses have done well. that is they’ve cut their costs on the labor side, and at the same time they’ve probably made some money in the process. and therefore it’s a good sign for corporate―for corporate balance sheets and as well, maybe a stimulant to more business investment in the future.
>> with that business investment will there be employment returning as well or does this continue to be a jobless recovery?
>> well, so far it has certainly been this that. i would assume that once businesses get confident enough to make business investment and to rebuild inventories, then they’ll have to start to increase labor.for the moment it’s not happening, and indeed i think it’s probably going to be another quarter or two before we can really say whether or not it will happen. so more growth, more investment, and then more jobs. that’s my prediction, anyway, and certainly it’s the hope.
>> give me your sense of pricing pressures right now. are you more concerned about deflation or inflation?
>> i think for the next six months the disinflation story is still going to be the dominating theme. we still have cost cutting going on, and of course, the business community we still have a very very large negative output gap which is usually associated with downward pressure on prices and wages. my forecast is that the key inflation statistics, whether it’s c.p.i. or personal consumption deflater probably fall by another perhaps half point on a year-over-year basis between now and, let’s say the first quarter of next year. so disinflation still the theme. it’s still the worry at the fed. and my guess is that they are not only going to leave policy unchanged, but if this inflation forecast pans out it may well lead them to make another ease before this year is over.
>> uh-huh. so do you―with that in mind do you see this bond market selloff as a bursting bubble or a real belief at least among the players in the market that higher fed rate moves are coming if not sooner, at least before any further cuts happen, which may be much less likely?
>> the markets in the last few weeks have certainly backed up tremendously. the bond market has. and it’s now causing some disruption even in the stock market. the bond markets have essentially built in a fed tightingening in the first half of next year. they built in two 25 basis point tighteningings. i frankly don’t agree with that assessment.
>> we are out of time. brian fabbri.
