Thursday, March 15, 2007

Further Evidence of Stagflation

I've been telling you for quite some time now that the U.S. faces a significant slowdown, probably a recession, combined with strong inflationary pressures, i.e. stagflation.

Today offered further evidence of that view, with weak manufacturing survey data from New York and Philadelpia. Note however how the price indicators in these surveys rose. And while initial jobless claims fell somewhat, continuing claims rose much more.

Meanwhile producer prices rose far more than Wall Street forecasts, with not only energy and food prices soaring, but even the "core" index rising significantly too.

A Merril Lynch analysis meanwhile argued that unless the Fed cut interest rates, the probability of a U.S. recession is 100%. While I think that a recession now seems more likely than not (i.e. my current estimate is a 70-75% probability), I wouldn't put the probability fully as high as 100% as there is always a possibility of some positive supply shock like another dramatic oil price decline. However, I don't think the Fed will have any room to cut interest rates with inflationary pressures being so strong.


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