One on One with Lakshman Achuthan, Managing Director, Economic Cycle Research
Thursday, August 30, 2007
|
|
|
|
SUSIE GHARIB: From Wall Street to Main Street, a big focus tomorrow will be on the small resort town of Jackson Hole, Wyoming. That is where Federal Reserve Chairman Ben Bernanke will address central bankers and economists from around the world. Investors will be listening closely for hints about a possible rate cut. Joining us now with a preview of what to expect and his outlook on the economy, Lakshman Achuthan, managing director at Economic Cycle Research. Hi, Lakshman.
LAKSHMAN ACHUTHAN, MANAGING DIRECTOR, ECONOMIC CYCLE RESEARCH: Hi, Susie.
GHARIB: Well, what does Bernanke need to say tomorrow to reassure investors and American consumers?
ACHUTHAN: Well, you know, typically this is a very, kind of, staid affair with an academic kind of tone to it. And the subject matter was with respect to housing and monetary policy. I'm sure they picked that topic long ago. However it is first and foremost on everyone's mind right now. You know, he might try to not say much. He certainly said in the past that he would like to be very careful about the pronouncements that he makes about the economy outside of official venues. Here, however, I think given the circumstances, given that all of the jitters in the markets that we are all so well aware of, something will probably slip out. It will be taken one way or another, either positive or negative with respect to the rate cut debate. Certainly the markets are betting almost 100 percent that they will be cutting rates at the next meeting.
GHARIB: Let's get your view on this rate cut debate because as you know, there are some people who feel that the U.S. economy really does need a rate cut and would benefit from it and others say it doesn't need that. Where do you stand in this debate? Should the Fed cut rates or not?
ACHUTHAN: Well, you know, without giving a specific policy pronouncement, there are two big concerns that the Fed traditionally has. One is keeping inflation under control and the other is avoiding a recession. And on both counts, we don't see a lot of trouble in the near term. Inflation is not spiraling out of control. So they have leeway to cut if they wanted to. It wouldn't be irresponsible in terms of being an inflation steward. On the other hand, the economy is not about to tip into recession. We had some revised GDP numbers out today, 4 percent growth in GDP. This is well above trend. I mean I was looking into the numbers. You had over 27 percent growth in nonresidential construction. That's -- that's business spending. That is big, booming activity.
And so it doesn't seem like the economy is on the verge of stalling out, even though we have some of these credit problems. So we get down to this relationship between the Federal Reserve monetary policy and the target Fed funds rate, and the market and what they want. And certainly the market has made it clear they would like a cut and the Fed would like to hold. We have a little bit of a game of chicken going on here. I suspect it really boils down to what happens in these credit markets that we've been watching and if they can become more liquid as we go into September. If they do, the Fed may disappoint Wall Street again.
GHARIB: Another big question about the economy and whether or not we need a rate cut is all about the American consumer. What kind of shape is the American consumer in and what is going to be the future of consumer spending which is such an engine of growth for the economy. What is your analysis on that?
ACHUTHAN: Well, certainly, look, the consumer -- people have written off the consumer more times than I can count. The consumer, American consumer has come through in various ways to continue buying. And we see that again in some of the latest data. They are not accelerating growth quickly but they're certainly not pulling back so sharply as to cause or precipitate a recession. Home prices being weak and -- and not rising is putting some pressure on consumers. The stock market volatility is also putting some pressure on consumers. This is for the time being offset by a pretty healthy jobs market. Non-financial services which is where most of us work, over 60 percent of us work there, is still growing healthily. Manufacturing sector which had been bleeding jobs earlier is now less of a drag if not adding some jobs. As I mentioned nonresidential construction is quite strong. So this economy isn't stalling out right here. Having said that, we do need to see these credit issues resolved.
GHARIB: I'm going to have to jump in. We've run out of time. It is refreshing to hear an optimistic, upbeat view on the economy for a change. Thank you so much Lakshman.
ACHUTHAN: You're welcome.
GHARIB: My guest tonight, Lakshman Achuthan, managing director at Economic Cycle Research.
