Interview: Chief Economist at Friedman, Billings
>> wholesale prices rose less than forecast in august, suggesting inflation was limited before hurricane katrina boosted oil and gas to record highs. investors have another look at inflation before next week’s federal reserve meeting. that is when the consumer price index is released on thursday. steve east is chief economist at friedman, billings, ramsey. he joins us from his office in arlington, virginia as we take a closer look. steve, welcome.
>> thank you.
>> given that the producer price report that came out today and the consumer price report that comes out in two days, given that they’re august data, how well of a handle do you have, do we have on the inflation picture right now?
>> well, if you look at p.p.i. or c.p.i., year over year graphs it looks like the trend on both are still up. to know that today we had p.p.i. data a little better than the market expected. i think what we know before katrina is that the overall trend still looked up and it is hard to imagine that the effect of katrina will do anything but put more upward price pressure on the indices.
>> how much higher?
>> well, that’s a good question. i mean you could see significant gains in the p.p.i. and c.p.i. in september, in the headline numbers that include energy. i think the real issue is how much of this energy price increase is going to bleed down into core or ex-food and energy price data. with an unemployment rate of 4.9% as of august, that pretty much represents full employment. increasing anecdotal evidence of shortages of skilled labor, i think the fed is really going to be concerned that we’ll start not just to have commodity price and energy price inflation but wage inflation. wage inflation is a little harder to get rid of than energy or commodity price inflation. it can be a little more long lasting and get a little more ingrained.
>> so tie that into what you anticipate the federal reserve will do next week. we are seeing traders move in the direction that they do believe the fed will, in fact, raise rates next week. what is your thought?
>> i think it will be a bit of a tough for the fed. at end of the day what the fed will do is make a determination that letting inflation get away from them is worse than some temporary soft economic data because of the hurricane. i think what the fed will do is just keep raising rates. i see them going up 25 basis points to 3.75% in fed funds next week. i think they’ll not stop until they get to 4.5%.
>> what do you think the treasury market will do?
>> well, i think the short end of the curve will sell off, i i.e., yields on the short end of the curve will go up. we have the so-called conundrum on the long end of the curve. while i think long rates in the 10-year treasury yield will go up some, i don’t think it will go up much. we’ll probably peak at 4.5% early next year.
>> one thing that is interesting to me is you had a note to investors today, to clients lowering your third quarter economic forecast, lowering them just today. why that delay since katrina struck? why today would you lower the forecast?
>> well, in the immediate aftermath of katrina, things were pretty unsettled. and once we had a chance to sit down and take a look at some of the incoming data and look at some of the data released just after katrina, i reached conclusion that inventories will probably have a negative effect from the drawdown in petroleum inventories. that will have a depressing effect on g.d.p. in the third quarter. it looks to me that spending on capital equipment will not be as strong in the third quarter as in the second quarter. so i still think that g.d.p. growth will be pretty good in the third quarter, 3.7%, because of the strength i think we’ll see in consumer expenditures which mainly happen in the month of july but still in the third quarter.
>> want to talk a little bit about tax cuts as well. a lot of talk these days, everyone trying to game and speculate what, in fact, congress will approve by way of tax cut proposals, that that may change given the federal recovery cost of katrina. what influence do you think this will have on growth estimates from economists and actually on growth?
>> to the extent that congress will spend a lot of money, which they have appropriated a good deal already to deal with the aftermath of katrina, that will boost g.d.p. growth and keep it higher than it otherwise would have been. as far as the prospect for tax cuts, i think that a lot of things will get put on hold, vis-a-vis, things like tax cuts because the cost of katrina aftermath will be pretty huge. at some point the congress is going to have to deal with the fact that they just don’t have as much money as they’re spending.
>> thank you for joining us.
>> you are most welcome.
>> steve east is chief economist at friedman, billings, ramsey. lehman brothers reporting third quarter earnings tomorrow. margaret popper has a preview and what to look for from wall street’s other large brokerages. that comes your way after this break.
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Listen Market briefing -- Ellen (slow)
NYSE --- Deb (fast)
Katrina --- Peter (slow)
>> welcome back to “after the bell.” i’m ellen braitman. 30 after the hour. let’s recap the day on wall street. stocks decline as consumers and investors become increasingly pessimistic about the economy in the wake of katrina. also because of record oil prices. the dow down 85 points. the s&p losing nine. the nasdaq down 11 points. as for the nasdaq, it does now move the nasdaq into negative territory for the year to date performance. the nasdaq composite now down .2% so far for 2005. as for the dow and s&p, it was consumer stocks helping to lead today’s declines. deborah kostroun at big board with more on that action. hi, deb.
>> thanks a lot. ford reached a final agreement to take back 23 plants and offices to help the former parts unit, visteon, cut their costs. the facilities will be transferred october 1 to a ford-managed entity. most of them will be prepared for sale. so something that we heard about today with ford and visteon. also as we talk about energy, many of the pipelines, however, like el paso, it was higher on the day. in fact, they actually got an upgrade at lehman brothers. back to you.
>> thank you so much. deb look at energy stocks. let’s get a look at latest trade on crude oil prices where you did see prices fall today. continued signs the release of emergency reserves will be adequate to make up for lost production. down .4%. $63.11 is the most recent trade. gas prices gained today on renewed speculation fuel supplies will decline because of damage to refineries during katrina. let’s take a closer look at that story, at the status. four u.s. refineries remain shut down in the wake of the storm. that word comes to us today from energy secretary sam bodman. he is touring the gulf coast along with the interior secretary. our peter cook is in washington following that story. he joins us with the details. peter?
>> well, ellen, bodman and norton are highlighting the administration’s response. bodman expressing great concern of natural gas supplies heading into winter. their first stop was the strategic petroleum reserve site in louisiana. bodman said four gulf coast refineries remain offline and timing of their return remains uncertain. norton pried the latest production outlook in the gulf of mexico.
>> we on the offshore side see that about 58% of oil remains offline and not yet flowing. and about 38% of natural gas.
>> now in the flight over from houston, bodman defended the administration’s decision to release approximately 30 million barrels of oil from the strategic petroleum reserve in the wake of the hurricane and to loan another 12k.6 million barrels to refiners. the u.s. has no emergency reserve of natural gas. bodman said that’s his department’s next big concern.
>> if we get through the problems that are presented by an absence of refining capacity for the next two to three months that will be the next wave, the next issue we’ll have to concern ourselves with is the availability of natural gas which new england and the midwest are both heavily dependent upon.
>> now gas futures touched a record of $12.30 on august 31 and have more than doubled in the past year. the cato institute thinks the public’s attention will shift.
>> gas usage is high tphert winter than the summer because it is used for heating needs. i think consumer also discover the high price for home heating that they saw the last couple of years not only have not gone away, they have gotten worse.
>> secretary bodman says a team within the energy department is evaluating the natural gas supply situation heading into the heating months. the secretaries stop in mississippi later today to visit a gasoline pipeline serving the east coast that has been restored since the storm.
>> peter, thank you so much. everyone very much focused on energy in terms of how it translates to inflation data. today we had the latest read on inflation with the producer price report. on thursday the consumer price index released for august. both of those, however, not taking into account katrina. they’re august data, not september data. after the break we bring in steve east of friedman, billings ramsey. we ask him for his latest read on the inflation situation, what it will mean for the federal reserve meeting taking place next week. traders pricing in the fact that the fed will continue to raise rates including next week’s meeting. we bring in steve east and get his thoughts straight ahead.
