The consumer price index was lower than expected on both the headline and core levels. This would indicate that profit margins are being squeezed at the corporate level, as the producer price index has been running at a higher rate than the CPI. Those higher prices to producers are not being passed through. But keep in mind that over 70% of the costs of goods sold is labor, not materials, so rising producer prices affect margins to a lesser extent that you might at first think.
The Wall Street Journal has a page-one article that takes a very benign view of the economy, saying that a growing number of economists are growing more optimistic that there will be no recession. Consumer spending and jobs have remained surprisingly resilient, and the Fed has done a good job injecting funds where they are most needed.
The standard definition of recession is two negative quarters of GDP. A recession can also be described as a prolonged and protracted downturn in economic activity. The high priests who determine recession (usually well after the fact) may well describe this period as recessionary by using the latter definition. But we haven't had a down quarter yet, and the quarter that just passed will be revised up from +0.6 to probably +1.0% or more, as I have mentioned several times in recent letters. With the rebate checks in the mail (whether you like the concept or not), the current quarter is likely to show a positive reading of over +1.0%. Sluggish, to be sure, but not recessionary.
The oil market continues to be buffeted by news and rumors. Yesterday, there was a report that Iran was thinking about a production cut. Why Iran would do that at $125 oil is a mystery, but the rumor contributed to the rise in the price of crude. Today, Dow Jones Newswires reports that the country's departing OPEC governor says Iran is storing 25 million barrels of oil in tankers in the Persian Gulf, as there are no buyers. The stored crude is "the main proof the market is oversupplied" and that price and fundamentals are disconnected (thanks to Bear Stearns for the info).
Bear Stearns also put out a report today opining that the economy is "beginning to recover after a sharp two-quarter slowdown." The firm does not expect a recession, and first-quarter GDP is likely to be revised upward (as I mentioned above), and the second quarter will show growth of 1.5% to 2.0%. Bear expects the second half to grow 3%. That would be nice.
Part of a negative view on the economy comes from a belief the consumer will be forced to hunker down and cut spending, since mortgage equity withdrawal (MEW) is no longer a vehicle for funds. Bear's analysis of the Fed flow-of-funds data shows a "clear connection between MEW and the household sector's net addition to financial assets and ... a relatively low impact on consumption."
I believe consumer spending is determined by personal earnings expectations, and that is why I watch the weekly unemployment claims and the monthly jobs numbers so closely. Despite all the other stuff, jobs data have been OK, not great but OK, and the economy has avoided recession.
Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.
Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.
Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.
