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The Seiders' Report, June 2006
Highlights
 • Core inflation has been firming up as the expansion has matured and labor markets have tightened, and high energy costs have been leaking into the core through business cost structures. Core inflation now is colliding with the upper bounds of various Federal Reserve “tolerance ranges.”
• Economic growth is coming off the first-quarter surge and a period of below-trend GDP growth lies ahead —an adjustment process that should help extend the life of the current economic expansion for at least several more years.
• Employment growth is slowing down with the growth in economic output (real GDP), and this process should restore some slack to labor markets before long —an essential element of an extended economic expansion with low inflation.
• Recent statements by Chairman Bernanke and other Federal Reserve officials show much greater concern about upward pressures on core inflation than about the evolving economic slowdown, even though much of the core inflation issue can be traced to a highly controversial housing component. It’s now virtually inevitable that the Fed will enact yet another quarter-point rate hike at the conclusion of the next FOMC meeting on June 29, and further increases can’t be ruled out.
• The Fed’s display of anti-inflation resolve, combined with similar positions taken by various foreign central banks, have put heavy hits on U.S. and global stock markets while lowering longer-term inflation expectations among financial market participant —fostering a modest decline in long-term interest rates during the past month.
• The “moderate” and “orderly” housing slowdown appears to be on track, marked by systematic declines in mortgage applications, home sales and housing starts as well as by a slowdown in house price appreciation, and this process should extend well into next year as long as our broad economic and financial market forecasts stay on track.
• The projected “soft landing” for housing in 2006 and 2007 certainly will have some geographic rough spots, including previously “high-flying” markets as well as “earthbound” markets where economies have yet to stage meaningful lift-off following the 2001 recession.
• On a national basis, housing production now is transitioning from a strong engine of economic growth to a drag on GDP growth; indeed, the projected contraction in residential fixed investment is the key component of the evolving and projected slowdown in growth of real GDP.
• Support to the economy provided by large capital gains on housing and associated stimulus to personal consumption expenditures undoubtedly will wane as time passes, but this shift will not be abrupt; indeed, equity in owner-occupied housing displayed solid growth in the first quarter despite the slowdown in price appreciation and ongoing borrowing against housing equity.
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