Economically Speaking

With the dreaded “I” word – inflation — monopolizing much of the water cooler discussion these days (except here around Money Morning’s water coolers, where the “S” word – stagflation – is getting nearly equal time…) two million Americans were able to join in and explain why escalating costs are not necessarily a bad thing (at least, not for them). The federal minimum wage rose from $5.85 to $6.55 an hour last week, on its way to $7.25 in 2009. While higher oil-and-gas prices have been seen as the primary culprits for the recent pressures, expect some new wage inflation concerns to emerge as businesses look to pass along these higher costs to consumers.

Housing reports highlighted the economic data of the week, and in general, “experts” agree that any rebound is still a long way from coming. For starters, home prices fell in May by 4.8% from last year’s levels. Existing home sales plunged by 2.6% in June, more than twice the estimate of most analysts, and more than 15% below the level of activity a year ago.

New home sales dropped by ONLY 0.6% in June, a better-than-expected showing that did little to reverse the concern of the prior (weaker) releases. On the bright side (yes, there is always a silver lining), durable goods orders experienced its best showing since February, a strong sign that manufacturing is not suffering as badly as housing.

Likewise, a consumer sentiment index rose (ever so slightly) as Americans felt better about spending those refund checks that were part of that government economic stimulus package. The U.S. Federal Reserve’s Beige Book showed that policymakers continued to grapple with how best to handle the dual crises (slow growth vs. inflation), though Fed Chairman Ben S. Bernanke seemed confident that the country could avoid the stagflation of the 70s.

For now, most economists expect the Fed to leave rates unchanged at the August 5 Federal Open Market Committee meeting. After all, raising rates to combat inflation could prove harmful to the already weak economy; while cutting rates to stimulate growth could lead to further price pressures.

Weekly Economic Calendar

Source: Second Quarter GDP Release Set to Confirm or Deny U.S. Recessionary Fears

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