Ignoring the Naysayers

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The past few weeks, economists have been laying odds on two scenarios: a recession sparked by the housing downturn, or stagflation–lousy growth plus rising prices. Neither is very appealing. But the latest data provide a bunch of positives. Yesterday, we had news that retail sales rose 0.7 percent in March, with February sales being revised upward to a 0.5 percent gain from 0.1 percent previously. So despite all the concern that consumers will stop spending now that they're tapping less and less into their home equity, they are continuing to spend.

As the econ team at Bear Stearns said, "Consumer spending growth looks to have been fairly robust in the first quarter, and we estimate real [spending] growth at somewhere between 3¾ percent and 4 percent. ... This strength supports our view that gains in jobs and income are far more important to consumer spending than asset valuations, housing, or mortgage equity withdrawal."

Clearly, Americans are somehow failing to fully comprehend the message put out by the naysayers that incomes are falling, all the new jobs are low-paying, and millions of existing jobs are headed overseas. They're too busy shopping! Indeed, that's just what the always insightful Ed Yardeni of Oak Associates told his clients this morning:

"CNN's Lou Dobbs told consumers that all their jobs were going overseas and that there was a war against the middle class. Consumers were too busy paying at the checkout counter to pay any attention to their eulogists. ... They've enjoyed huge capital gains in real estate, the stock market, and their own businesses. Since capital gains are excluded from personal income, they knew that the negative savings rate reflected their prosperity, not financial stress. That's been confirmed by soaring federal tax receipts, which have significantly narrowed the government's deficit. Consumers aspire to be rich like some of their wealthiest detractors including ... Bill Gross, Warren Buffett, and Stephen Roach."

Then earlier today came news that core inflation in March rose just 0.06 percent. That takes the year-over-year rate down to 2.5 percent from 2.7 percent and the three-month annualized rate down to 2.3 percent from 2.5 percent. (Keep in mind that Federal Reserve Chairman Ben Bernanke would like to see inflation between 1 and 2 percent.)

To Kenneth Beauchemin, U.S. economist at Global Insight, the numbers reveal "a short-term inflation path that is consistent with the decline so eagerly anticipated by the Fed. Similar improvement during the second quarter will be required before the Fed can take the rate-hike option off the table, however. We continue to maintain that core personal consumption expenditures (PCE) inflation will descend to the 2 percent mark by the close of 2007."