Happy July 4th Back At Ya Goldsnow.Maybe This Will Cheer US Up A Little.
This of course depending on your investment strategy.This being the good ole gold thread and our inflation watch team befuddled to date,maybe this will explain things that have not made sense so far.
P.S: I am Canadian who likes the USA and have enjoyed my many vacations there.Have met some of the nicest folks you could imagine in my travels.My best experience was to travel The Great Divide in my American made Jeep a few years ago.Ended up 12,500 ft. at the top of a mountain in Montana one day. What a hoot!Sorry..won't be down your way again till ya gets that dang dollar down.:-)
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NEW YORK (MktNews) - The rapid non-inflationary growth that distinguished 1997 as a remarkable economic year will prove to be a brief anomaly, giving way to wage pressures and the first indications of price inflation later this year, according to independent economist Michael Strauss.
ÿÿÿÿÿStrauss said wage inflation, running at a 4% clip over the past several months, typically leads the consumer price index by 12 to 18 months and is about to trigger a turning point in what has been an unusually well-behaved business cycle.
ÿÿÿÿÿStrauss is former chief economist at Sanwa Securities and was responsible for the forecasts that won Sanwa the Market News award for top economic forecasting department for 1997.
ÿÿÿÿÿ"Wages will begin to offset the flat product prices by late summer or early fall, cutting into corporate profitability and raising a challenge for the Fed," Strauss said in an interview.
ÿÿÿÿÿStrauss largely attributed the lack of inflation so far to the productive benefits from corporate downsizing, a central feature of American industry during the mid-1990s.
ÿÿÿÿÿBut he warned that future troubles will emerge from this success. He said that industry, already streamlined and currently seeing a cyclical slowdown in capital investment, will now find it more and more difficult to discover and implement new efficiencies.
ÿÿÿÿÿStrauss sees the CPI running at an annual rate of 2« % in1998, with the first half of the year, benefitting from low oil prices, coming in at a rate below 2%.
ÿÿÿÿÿBut in the second half, Strauss predicts a CPI rate near 3¬ % as wage and benefit increases begin to outstrip productivity growth.
ÿÿÿÿÿHe sees specific pressures arising from the service sector, where he predicts prices will rise at an annual rate of 3¬ % to 3« %. He said a rise in medical care and benefit costs, as Hospital Maintenance Organizations recoup recent losses with price increases of 30% to 50%, will begin to surface in the employment cost index in late 1998 and will remain a major factor moving toward 2000.
ÿÿÿÿÿStrauss stressed that traditional economic laws, though obscured in recent quarters, have not been repealed but have only been delayed in their effect, creating what he describes as "abnormally strong, late cyclical growth."
ÿÿÿÿÿStrauss sees full year GDP growth of 2_ %, with the risks one-sided toward stronger growth. He expects first-quarter growth, fueled by mild weather, an explosion in consumer spending, and a strong housing sector, at a solid 3.5% to 4.0% with final sales at a strong 4.5% to 5.0%. He sees some of this activity being borrowed from the second quarter, where he pegs growth at a temporary lull of 2¬ %.
ÿÿÿÿÿBut for the second half, Strauss expects a gradual building in growth back near the 3% level, with strong consumer spending providing the backbone.
ÿÿÿÿÿHe described consumer spending -- spurred by solid wage gains, low inflation, strong job growth, and the rise in the wealth effect -as the strongest in 10 years, saying it is a "freight train that is still getting up to full speed."
ÿÿÿÿÿStrauss stressed that many economists have been underestimating the strength of the consumer, leading to unrealistically low growth forecasts. "The real disposable income of the consumer is surging, with the two million jobs created in the last five months setting the stage for sharp expansion," he said.
ÿÿÿÿÿOf special note, Strauss sees only the most limited slowdown effect arising from the troubles in Asia. He cited the insular nature of the American economy, where imports represent only a 10% share of activity, and the inability of Pacific governments to help fund exporters as key factors limiting the impact.
ÿÿÿÿÿ"An economic death dive in the U.S. is not going to happen because of Asia, there will be no quick flood of cheap imports," Strauss said.
ÿÿÿÿÿGiven the prospect for rising employment costs and an absence of an Asia effect, Strauss said there is a "strong 30% chance" that the Federal Reserve will need to make the tough decision to raise interest rates at or just after Labor Day.
ÿÿÿÿÿ"We've been driving 65 in a 55 mile-an-hour zone but the weather's been sunny and warm and the driving safe. By Labor Day, however, the clouds will build and the speed will have to come down," he said.
ÿÿÿÿÿIn other predictions, Strauss sees little upside left for long-term interest rates in 1998. "In the past, it has proved very difficult to break 5_ % on the long bond, and investors have been rewarded historically to get out when under 6%."
ÿÿÿÿÿStrauss pegged a 6.15-25% range for the long bond through the year, noting especially an absence of supply pressures, due largely to an expected budget surplus of $15 to $20 billion.
ÿÿÿÿÿFor the Dow Jones industrial average, however, Strauss sees trouble, predicting a top of 8,850 and an eventual retest of 8,000. "With the peak in earnings already behind us, we're not far from a bubble," he warned.
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By Mark Pender
Market News Service |
