A more bearish view on the economy
MBG INFORMANTION SERVICES--- MCMILLION, CHARLES--- Chief Economist
>> welcome back. as we’ve been telling you, the economy added far fewer jobs than expected in july. fed chairman alan greenspan calls it a soft patch. but our next guest is not so optimistic. for more on the labor market and what it means for the economy we bring in charles mcmillan, coming to us from our washington bureau. thanks for joining us.
>> glad to be with you.
>> we would like to taw talk to you because you have a more bearish view on the economy than many on wall street. they were surprised by there, but you weren’t necessarily, were you?
>> i probably wasn’t as surprised as others were because we’ve we’ve been following the consumer savings rate which is very, very low and debt ratios are extraordinarily high. so we weren’t as surprised by this as some were.
>> the fed has been encouraging people to spend for a long time here and encouraging them to borrow with the way they have been controlling interest rates here. you think this is not good for the economy as it stands right now?
>> the problem is that wage and even income growth have been virtually stagnant. we heard last week that real per-capita income fell to a two-month low in june and even with that and the plunging consumer spending figures that we got last week, consumers, households, are still spending almost all that they earn each week.
>> what happened here? what happened to the burgeoning recovery we saw and signs of g.d.p. growth and now we see data point after data point of weakness. what’s your view?
>> i think in the spring there was quite a bit of refinanceing and households taking equity from their homes and spending it. and i think much of that, now, has gone, certainly slowed severely. so that now with these very low savings rates for consumers and very high debt ratios and stagnant to very slow growing wage and income growth, i think we have a lot of headwind going into the next several months.
>> where does it go from here? where do you see the economy going for the next six to 12 months?
>> i certainly hope the fed does not make a move next week. i think this is not the time to be raising interest rates. consumers and businesses have enough costs to deal with right now. i think this is not the time to be raising interest rates.
>> there is still that expectation, though, in the market right now, that they will do exactly that. they will stay the course and there are people that say they should have expected this kind of a move in the summertime and they will continue to do what is expected of them.
>> i think the market is expecting the fed to move. i think there’s less expectation the fed will move this afternoon than there was about 8:25 this morning. i hope that as we all talk about this over the weekend and into the early part of next week, i hope the fed understands that they really don’t have a lot of room to stimulate this economy with record budget and trade deficits. so this is not the time to be raising interest rates.
>> you mentioned the deficits in those situations, don’t seem to be headed anywhere but up at this point. explain why you feel that’s an important point there.
>> outsourcing, of course, has been getting a lot of attention. and companies are under enormous pressure from their branch offices that are located in china or in india or mexico or somewhere else to cut costs. so we see brutal cost-cutting, certainly for 32 months into a recovery. this is really unusual. and i expect that will continue.
>> what’s the biggest threat to the economy in your view right now?
>> i don’t know. the remarkable thing about the economy right now is that with the middle east situation, with the volatility of oil prices, with federal deficits as high as they are and consumers and the problems that they are and the exchange rate stresses, that we really have a lot of areas to look. so it depends on which industry you’re in, where your biggest risk is right now but there are a lot of risks out there.
>> how much of the uncertainty concerning our own political climate is working its way into the economic aspect, if at all right now, do you think?
>> i don’t think very much. i think that the clinton―i’m sorry, the kerry campaign has really taken on much of the clinton specter and i don’t think that it’s frightening to the wall street or mane street―mane street community particularly. so i don’t think that’s the issue, i really think it’s low savings rate, stagnant and glining wages―declining wages on incomes and the concern on oil and oil prices.
>> charles mcmillon is president and chief economist at m.b.g. services. biggest internet public offering may be postponed as regulators look closely at what’s going on at google. that story is up next.
