Dollars and Jens
Friday, August 25, 2006
growth, inflation, and all that
The first thing I want to note is that long-term productivity projections I've seen hover around 2%, and long term growth in the labor force around 1%. Holding a few things like hours per worker constant, this suggests a long-term "potential growth" rate of 3%. And, in fact -- this is really what I want to note here -- the unemployment rate drop from 6.3% in June of 2003 to 4.6% in June, 2006, constitutes a growth in the employment rate of 0.6% per year, as GDP growth averaged 3.8%. So the rest, perhaps, has been in line with these projections.
The next corollary, though, is that growth won't persist much above 3% unless the unemployment rate is to keep dropping, ceteris paribus. (It actually rose to 434% in August, incidentally.) If it does that, we're building some major inflation pressures for the next 2 years or so, and the fed will have to keep raising rates.
What makes me feel like mentioning this now is an article at money.cnn.com that essentially notes the same thing:
First American Funds recently cut its equity exposure to "neutral" from "overweight," saying it sees a weakening environment for stocks through the rest of the year.It's always hard to say exactly what kind of growth "the market" has baked in, but I'm inclined to agree with the macroeconomic assessment, in any case.
Among the reasons for the likely downturn, Keith Hembre, First American's chief economist, pointed to the disconnect between market expectations that the Fed is done raising rates and analyst expectations that the S&P 500 will still post double-digit earnings growth this year.
"The environment in which you see earnings growth at that level is not consistent with the Fed keeping rates steady or lowering rates," Hembre said.
"One has to give, either the earnings or the Fed," he added. "We think it will be the earnings, but neither is good for stock markets."