One on One with Brian Wesbury, Chief Economist for First Trust Advisors
Thursday, January 10, 2008
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SUSIE GHARIB: More analysis now on Ben Bernanke and his comments about the economy today. Joining us with his thoughts, Brian Wesbury, chief economist at First Trust Advisors. Hi, Brian.
BRIAN WESBURY, CHIEF ECONOMIST, FIRST TRUST ADVISORS: Hi, Susie. Good to be with you.
GHARIB: Brian, What's the most important take-away message from chairman Bernanke's speech today?
WESBURY: I think the most important message that he said was that their balance of risks or in other words, what the Fed is worried about today, has shifted toward the economy and away from inflation. Up until this point, it has been equally balanced between the two and as a result, the expectations are that the Fed will cut interest rates by a half a percentage point here later this month. I think they'll wait until their meeting to do that, but that's the clear change in message that came from his speech.
GHARIB: And certainly that's what the market's takeaway was that they're counting on that half a percentage point cut. Will that fix the economy? Will that keep the economy out of a recession?
WESBURY: Yeah, well, this is kind of a difficult question for me to answer because I don't think we were going to go into recession to begin with. But clearly, what this does is it's like throwing gasoline on the fire. If you look at 2007 as a whole, our economy grew 3 percent and if you exclude the housing sector, it grew 4 percent. This -- 2007 was a better year for the economy than 2006 was. And as a result, I think we had a lot of momentum going into 2008. One thing we have to remember about chain store sales is that we report same store sales. And if you really look at total sales, in other words all of the new stores that companies are building, they're cannibalizing because they're building stores closer together like Walgreen's and CVS. In fact, total sales are still growing pretty strongly and I think some inflation concerns remain. So, I think this is like throwing gasoline on the fire and I think we're going to be growing very rapidly in 2008.
GHARIB: Well, that's kind of interesting because more of the evidence is showing a weaker economy. The Fed president, the Fed chairman today said that he is not forecasting a recession, but we're hearing from a lot of Wall Street economists that they are predicting a recession.
WESBURY: Right.
GHARIB: How come there's this disconnect that some people are looking at the same data and coming away and saying an extremely weak economy and you're even saying it's a strong economy?
WESBURY: Right. Well, one thing is I'm from the Chicago area. The Midwest is different than Wall Street. There are clearly problems on Wall Street, but that does not mean that the economy as a whole is having problems. The housing market is only 5 percent of GDP, gross domestic product. The other 95 percent of the economy is doing well. The unemployment rate is still at 5 percent. Initial unemployment claims today for last week actually fell by a significant amount, which was a surprise on the positive side. Incomes are still up. There's no doubt that the housing market is having problems. But that's a relatively small part of the economy.
GHARIB: OK. Let me ask you another question about the Fed's handling of this crisis, because we have on the one hand we're getting very mixed signals from Fed officials. Bernanke saying, you know, that the economy is weakening. We had Fed bank presidents all this week saying inflation is a risk. There's a lot of these Wall Street economists and analysts I'm talking to saying they are uncomfortable with the Fed's handling of this crisis. Do you have confidence in what the Fed is doing? WESBURY: Yeah, I think that's a little unfair to the Fed and what's interesting is that many of these Wall Street banks are the reason that we're in the problem that we're in. They had lax lending standards. They were pricing bonds. They've had no chance of being repaid or loans that had no chance of being repaid at excessively high rates. They caused this problem. Now they're asking the Fed to bail them out and the members of the Fed, different members had different worries. Many are worried about inflation. Gold is almost $900 an ounce. Oil is in the mid 90s. Inflation has been picking up. That's a real concern. Others are worried about the economy. So there's a real debate on the Fed. I think it's unfair to attack the Fed as much as it's been attacked.
GHARIB: All right. We'll leave it there. Thank you so much, Brian.
WESBURY: Thanks, Susie.
GHARIB: My guest tonight, Brian Wesbury, chief economist at First Trust Advisers.
