One on One with Stuart Hoffman, Chief Economist at PNC Financial Services Group
Thursday, June 14, 2007
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SUSIE GHARIB: Joining us now to talk more about the outlook for housing and the health of the U.S. economy, Stuart Hoffman, chief economist at PNC Financial Services Group. Hi Stuart.
STUART HOFFMAN, CHIEF ECONOMIST, PNC FINANCIAL SERVICES GROUP: Hi, Susie.
GHARIB: Let me first talk to you about these sub-prime mortgages. To what extent are they still a problem for the economy?
HOFFMAN: Well, they are a problem. They don't seem, though, to have caused the U.S. economy to go into a black hole. The housing market is likely to continue to weaken, both in terms of sales and prices. And that means foreclosures are going to go up. But it seems to me the U.S. economy has sort of weathered that storm and I don't expect the housing market's recession to pull the overall U.S. economy down with it.
GHARIB: Where is the housing market in the cycle? Is it coming to a close? Is the worst over?
HOFFMAN: I don't think I can say the worst is over. I think the rate of decline in housing has been so steep the last year, it's not going to keep kind of falling off a cliff. But as we heard, foreclosures are rising, delinquencies are up. I think home prices will continue to fall. And we'll hear next week probably that home starts in the month of May were down. So I think we're going to see the housing market continue to be a drag on the U.S. economy for at least the rest of this year and into 2008.
GHARIB: All right. Let's talk a little bit about inflation. Tomorrow the consumer price index will be released. We heard already today about the producer price index. What is tomorrow's report going to tell us about inflation?
HOFFMAN: Yeah, today's report was sort of the warm-up act. The main event is tomorrow, the CPI. I think it will show a pretty big increase, maybe .6 of 1 percent on that sort of what we call headline number. But just as happened today and you talked about it, the market is going to look through to find out what they find core inflation, leaving out the big jump in gasoline prices which was around 10 percent at the gasoline station. And when they do that I think will you find the core inflation rose by .2 of 1 percent and is up 2.3 percent from a year ago. I think that will have somewhat of a calming influence on a market that has been particularly jittery, particularly a bond market over the last couple of weeks. But admittedly the number, the core number is up more than .2 of a percent, that will definitely hurt the stock and bond market as inflation jitters are already on the edge and that would be an extra jolt.
GHARIB: And how do you think the Federal Reserve will respond to these numbers if the numbers come out as you are talking about? Will it also trigger nervousness on their part?
HOFFMAN: No, I think the Fed is looking through a lot of the strength in the economy this quarter after it nearly ground to a halt in the first quarter. Inflation is a little elevated for the Fed. This core measure is up around 2 percent. Their favorite measure, the sibling and CPI called the deflater, sort of its younger sibling. And I think that if it's around 2 to 2 1/4 percent, the Fed's going to hold tight. When they meet later this month I think they will note inflation is still their predominant concern, but they're not moving interesting rates, certainly not down but not up either, given that inflation still seems to be well under control.
GHARIB: We have some other economists on this week who were saying that by the fourth quarter the Fed will start raising rates into 2008, maybe to about 6 percent. I'm taking it that you are not of that view.
HOFFMAN: No. I would respectfully disagree with those other economists. That's what makes markets. I no longer think the Fed will cut interest rates later this year, but if economic growth in the second half of the year is moderate as the Fed expects and I do as well and inflation is well, you know, well contained, I think there is every reason for the Fed, which this year by the way, this month is the one-year anniversary of the 5 1/4 percent funds rate, my guess is it's still going to be 5 1/4 percent when we get to the end of this year.
GHARIB: Real quick, tomorrow another report that is coming out is the consumer sentiment index from the University of Michigan. What is your view on the American consumer? How confident is he or she about spending?
HOFFMAN: Well, they seem to be OK. Their confidence level has gone down, but even as they were sort of moaning about higher gasoline and lower house prices, we learned yesterday May retail sales were pretty good. So I think consumers are a bit nervous, but their income is up, their jobs are up. So I think their confidence fairly steady. And even if they are feeling a little more glum, they seem to be cheering themselves up by going out and shopping.
GHARIB: We'll leave it there, thanks so much, Stuart. HOFFMAN: Thank you.
GHARIB: My guest tonight Stuart Hoffman, chief economist at PNC Financial Services Group.
