There’s a growing chorus of predictions that the economy’s due to slow later this year. But recent economic reports don’t yet jibe with that view. Could the forecasters be wrong? Or just early?
Either way, yesterday’s stronger-than-expected reports on factory orders and the service sector are the latest in a string of items that raise questions about what comes next.
Nonetheless, the Federal Reserve expects the economy will cool, if only slightly. Thus, Fed Chairman Ben Bernanke’s announcement last week that the central bank is considering a pause in the current round of interest-rate hikes.
The Fed wants to avoid a recession. But does pausing with monetary tightening come at the price of letting inflation gain a stronger foothold in the economy?
For some thoughts on that and related questions, we called Paul Kasriel, director of economic research at Northern Trust. In a telephone conversation yesterday, Kasriel expounded on why he too thinks the economy will moderate.
WHAT’S YOUR TAKE ON FED POLICY THESE DAYS?
The Fed’s following a restrictive monetary policy. Not necessarily a recessionary restrictive monetary policy. But I think the Fed has already put in place a monetary restriction so that we’ll see a lower trend in economic growth. The year-over-year growth in the first quarter was 3.5%, and I think we’ll trend lower than that as we go through the year.
WHAT EVIDENCE DO YOU SEE IN SUPPORT OF YOUR OUTLOOK?
There’s a lot of evidence in the leading indicators.
FOR EXAMPLE?
I guess I’m one of the last people to still pay attention to the money supply, and we’ve seen a significant slowdown in the price-adjusted or real M2 money supply.
And although we’ve seen some widening in the spread between the 10-year Treasury and the Fed funds rate, that spread on a longer-term basis has come down quite dramatically.
Meanwhile, housing has been a leading sector of the economy as a whole. If you look at things on a year-over-year basis, we’ve seen a definite slowdown in housing activity. Both new and existing home sales have slowed. And [house] prices are softening.
Then there are automobile sales, although I haven’t tested them as a leading indicator. But we’ve seen three consecutive months of flat sales. That is, February, March and April were all around 16.5 million units [for car sales]. That’s another indicator of slowdown in the economy.