A partial excerpt of analysis of the US economy by William C. Dudley, Chief US Economist for Goldman Sachs.

I like to refer to this as the reason George W is in trouble:

1. The conventional view is that the second quarter drop in consumer spending was due to higher oil prices. Thus, as soon as oil prices stabilize or decline, spending growth will resume and the US economy will be back to the races. We strongly disagree with this assessment. While higher oil prices did have a dampening effect on Q2 consumer spending, the effect was much smaller than the 3 percentage pt drop in the growth rate(from around 4% to around 1%) that is now reported. We estimate in this week's weekly center section article (nice job, Jan Hatzius), that the spending hit from oil prices under a reasonable set of asspts was more like 0.6 percentage points. Most of the slowdown is attributable to 3 other factors--the low household saving rate, the drop in mortgage refi activity, and the cessation of stimulus from tax cuts.

2. This idea that oil prices are to blame is a repeat of the past few years. Whenever growth disappoints a special factor is cited be it: 9/11, Terrorism, Sarbanes Oxley, or oil. The US is still in the throes of a post-bubble hangover--when stimulus fades, the economic growth pace drops off as a result--the special factors are not the major reason for the slowing. We are happy to have a below consensus growth forecast of 3.5% for the second half. The risk remains that we will drop those nos., not raise them. We think that the economy is going to fall way short of the 5 1/4% growth pace now consistent with the bottom end of the FOMC's central tendency forecast for 2004.

3. The Fed obviously disagrees with this analysis. The FOMC statement was hawkish, and that hawkish interpretation was reinforced by the minutes to the prior meeting which talked about a "series" of tightening moves. The major thing I took away from the statement was that the FOMC did not change its strategy at all--the last paragraph of the statement was unchanged from the prior meeting. Moreover, the softness in the data was dismissed as transitory. What this tells me is that the bar to stopping tightening is still quite high. The rationale for the Fed skipping September is hard for me to work out in my mind. If the data are firmer before the September meeting than the August meeting, how do you justify stopping, when you tightened in August? Also, because stopping would look political, the election calendar actually makes it more difficult to stop.

<font color="#000002" size="1">[ August 14, 2004 10:57 AM: Message edited by: reason ]</font>