Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
Gold And Silver Nothing Is Ever As It Seems And No Respite For PMs - 20th Dec 14
What Are Technical Indicators Saying About the Stock Market? - 20th Dec 14
Here’s How You Can Still Make 27% With Apple Even if You Buy Now - 20th Dec 14
Gold Stocks to Shine in 2015 - 19th Dec 14
Why Alibaba Stock Shares Are a Screaming Buy - 19th Dec 14
China, Dollar, Japan, Europe Burning Questions for 2015 - 19th Dec 14
U.S. Economy is in a Sweet Spot! - 19th Dec 14
US Dollar and the Gold Fairy Tale - 19th Dec 14
Show Me The Money (Flow)! Tracking Money-Flow Through Value Shifts In Stock Markets - 19th Dec 14
The Commodities Market Is Not Dying, It’s Just Hibernating - 19th Dec 14
The Price Of Gold And The Art Of War - 18th Dec 14
Euro Succumbs to ECB QE Expectations and FOMC - 18th Dec 14
John Williams: A Downhill Run for the U.S. Dollar in 2015 - 18th Dec 14
Outrage at Taliban Islamic Fundamentalists Massacre of 132 Pakistani School Children in the Name of God - 18th Dec 14
How Inflation Changes Retirement Benefit Choices - 17th Dec 14
The Real Reason It's Tough to Beat the Stock Market - 17th Dec 14
Russian Currency Crisis and Debt Defaults Could Create Contagion in West - 17th Dec 14
How to Profit From Russia's Stock Market Crash - 17th Dec 14
Russia Crisis - If You Put Your Money in the Bank Will You Get it Back? - 17th Dec 14
Crude Oil Price Crash, U.S. Employment and Economic Growth - 17th Dec 14
Opposing Forces At Play In Gold and Silver Precious Metals Complex - 17th Dec 14
Wall Street Will Always Find An Excuse For Not Raising U.S. Interest Rates - 17th Dec 14
Torture, Terror And Elite Schizophrenia In The UK - 16th Dec 14
Eurozone Conflict Will Bring a Major Stocks Buying Opportunity - 16th Dec 14
Viewing Russia From the Inside - 16th Dec 14
Gold and Silver Stocks Bottom - Are We There Yet? - 16th Dec 14
The Financial Industry Pigmen Win Again - 16th Dec 14
Crude Oil Price Epic Blowout - 16th Dec 14
Asian Stocks Markets: Sand In The Gears Of The Bull Market - 16th Dec 14
U.S. Dollar Trend Forecast 2015 - Video - 16th Dec 14
Silver Price Bottom? - 15th Dec 14
Gold Price Base Building Bullish Pattern - 15th Dec 14
Stock Market Probable Pop-n-Crash Today - 15th Dec 14
Stock Market Time for a Bounce - 15th Dec 14
Stock Market Euphoria: The Mother of All Ponzi Schemes - 15th Dec 14
Gold - The Weight of Time as Trend - 15th Dec 14
U.S. Dollar Collapse? USD Index Trend Forecast 2015 - 14th Dec 14
The Rushing Stocks Bear Market and How to Prepare - 14th Dec 14
Gold and Silver Dreaming of a White Christmas - 14th Dec 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Dramatic Stock Market Selloff

Here Comes Stagflation!

Economics / Stagflation Apr 29, 2011 - 08:41 AM GMT

By: Sy_Harding

Economics

Best Financial Markets Analysis ArticleIt’s official. The U.S. economic recovery is stumbling again, as indicated by Thursday’s report that GDP growth plunged to only 1.8% in the 1st quarter (from 3.1% growth in the previous quarter). And spiking oil, food, and other commodity prices have inflation on the rise.


Don’t lose sight of how we got here.

Exactly a year ago the recovery from ‘The Great Recession’ of 2007 – 2009 also stalled significantly as the government’s stimulus efforts, including rebates to homebuyers and cash-for-clunkers programs, expired. Economic reports from the housing industry, auto sales, and consumer spending were the leading indicators that the recovery had stalled, which was then confirmed when the 2nd quarter GDP report was released and showed economic growth had slowed from 3.7% in the 1st quarter to only 1.7% in the 2nd quarter.

At that point, the Federal Reserve seemed to panic, concerned the economy might be dropping back into a double dip recession. It began promising another round of stimulus, and then followed through by flooding the financial system with another dose of easy money via its current QE2 program.

That did the trick. The economy (and stock market) began to recover more strongly again. By the 3rd quarter of last year GDP was growing at a 2.6% rate, and then at a 3.1% rate in the 4th quarter. That was still well below the 5.0% growth of the 4th quarter of 2009, but promising.

However, over the past few months indications have been that the economy is stumbling again, and that it is due to the return of a number of the same issues that dampened growth last spring - along with a few new worries.

The early signs were again the return of dismal reports from the housing industry and consumer spending in January and February, accompanied by another inflationary leg up in oil, gasoline, and food prices.

And, as happened last year, those early signs have now been confirmed by Thursday’s report that GDP growth plunged to just 1.8% in the 1st quarter of this year, from 3.1% in the 4th quarter of last year.

It shouldn’t have been a surprise. Economists have been in a frantic race over recent weeks to revise their forecasts for 1st quarter growth downward. At the beginning of the quarter the forecasts were for 4% GDP growth for the quarter. Over the last two months the consensus forecasts dropped to 3.5%, then 3.0%, 2.5%, and last week to an average of 2.0%.

As noted , the actual number came in even lower, at just 1.8%.

With the negative economic reports, and rapid downward revisions of U.S. GDP forecasts by economists nationwide, and even globally, the first question is why did the Federal Reserve apparently not see the economy slowing?

In its statement after its FOMC meeting in March the Fed said, “The economic recovery is on firmer footing, and overall conditions in the labor market appear to be improving gradually.”

In its statement this week, after its April FOMC meeting, it said, “The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually.”

The Fed’s statements this week regarding inflation indicate it is also behind the curve in that regard as well.

Last spring’s economic slowdown was exacerbated by the spike-up in the price of oil from $72 a barrel in February to almost $90 at the end of April (a high not seen again for 7 months), which was taking spending money out of consumers’ pockets. And central banks around the world began raising interest rates to fight back at the food and energy inflation they were seeing coming at them.

But the U.S. Fed said it saw no inflationary problems.

And in its statement after its April FOMC meeting this week, even as oil prices have spiked from $84 a barrel in February to $112 a barrel, food prices have risen further, companies have begun passing their higher costs along to consumers, and central banks around the world have been aggressively raising interest rates even higher to fight back at worsening inflation in their countries, the Fed said, “Inflation has picked up in recent months, but longer-term inflation expectations have remained stable, and measures of underlying inflation are still subdued.”

As it did a year ago, gold, the historic hedge against inflation, spiked up in reaction to the statement, this time jumping a big $24 an ounce, apparently believing the Fed is even further behind the curve on inflation.

Regardless of what the Fed says, the reality is that, as the GDP report clearly reveals, economic growth has stalled again, even while the Fed’s QE2 stimulus program is still in full effect (but will expire in June).

And if gold and global central banks are to be believed, an inflationary spiral has been underway for more than a year.

It does look like the Fed is getting itself into a stickier mess all the time, that if nothing is done the economy seems headed into that 1970’s double-whammy nightmare of stagflation, a stagnant economy with rising inflation.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2011 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014