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ETC... ETC...
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Economic Update

6/03/08

Friends and Colleagues:

This week Scott Anderson, Senior Economist of Wells Fargo Economics talks with us about the current state of the economy....Recession?.....Stagflation?.....Rising Interest Rates? Read on to hear his thoughts and projections.

What was that about a Recession?!?

• 1st quarter GDP growth was revised to 0.9% from the 0.6% previously reported.
• This is noticeably above the 4th quarter pace of 0.6% GDP growth.
• According to Mr. Anderson, this reduces the probability of a 1930’s-style depression to virtually nil.
• He projects that the more likely path for the economy is a Stagflationary environment similar to the 1970’s.

Now just a minute...What happened to all those ominous fundamentals?

• Yes, the U.S. labor market, and consumer & business spending weakened further in the 1st quarter.
• Sure, the bank credit crunch intensified.
• OK, so oil prices marched to new record highs.
• Oh, and U.S. home prices plunged the most since the Great Depression.

And what about inflation?

• The Bureau of Labor Statistics’ current reading on CPI inflation is 3.9% over the past year....not too bad right?
• However, consumer expectations for inflation over the next 12 months hit 7.7% in May!!
• This is the highest reading ever recorded for this measure!

So with all this sobering news, what happened to our Recession?

• It turns out that Q1 GDP growth was heavily supported by that prior drag on our economy...the U.S. trade deficit!
• Apparently, the U.S. dollar’s 37% depreciation since 2002, combined with rapid growth in emerging market economies, is having a noticeable impact on our export performance.
• The timing is good, as slowing consumer demand is taming our taste for foreign imports (other than gasoline).
• The improving trade deficit added 0.8% to GDP growth in Q1, accounting for nearly all the growth in the U.S. economy.

Well, Mr. Anderson, where do we go from here?

• Anderson tells us that we are not totally out of the woods yet.
• Many of the negative economic trends that intensified in the 1st quarter will impact GDP growth with a lag.
• However, these economic headwinds should be nearly matched by the fiscal stimulus package over the next couple of quarters.
• Anderson calls it a stalemate between economic stimulus and plunging home values and rising energy costs.
• He says that Wells Fargo Economics is no longer forecasting any negative quarter of GDP growth for 2008 or 2009 (i.e.- No Recession!).
• They have however been marking down their growth estimates for next year, given the lingering credit crunch, home price declines and fading fiscal stimulus.

With all of these offsetting factors, where are interest rates headed?

• Anderson contends that the Fed’s aggressive rate cuts, liquidity injections, and Bear Stearns rescue have effectively truncated the downside risks to the economy.
• He says that the market’s attention is now fully focused on the inflation problem, and the Fed will soon shift its focus as well.
• Anderson projects that the next rate move from the Fed "will almost certainly be a rate hike".
• The Fed funds futures market has been aggressively pricing in Fed rate hikes starting as soon as the Q4 2008.
• Anderson says the futures market predicts the Fed will hike rates by 1/4% at least three times by mid-2009.

So what will it be....rising rates?.....inflation?.....stagflation? As always, stay tuned as our saga continues.........


THOUGHT FOR THE WEEK

The story of our lives....

Each day we wake up with a fresh opportunity to write another page in the story of our life. Yes, we are weighed down with the responsibilities that we carry each day ....making a living in a tough economy.....being a caring spouse..... a wise parent....an attentive child....a worthy contributor to our community......

But are these responsibilities burdens or blessings?

We need to think carefully about how we choose to view our world. Yes, we must go through difficult times.....but this is the stuff of life.....we can struggle with the challenges, or we can embrace the chaos.....and choose to delight in each new day that we are granted.

In the days and weeks ahead, may each of us choose carefully the spirit that we bring to our story....as we write each new page.

Have a good week.

David Rosenthal, MAI
President & CEO
Curtis-Rosenthal, Inc.
drosenthal@curtisrosenthal.com
www.curtisrosenthal.com






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