Tuesday, August 22, 2006

Economic outlook: 'very late cycle'

As the joke goes, Trotskyists have correctly predicted 18 of the last three recessions. One of the biggest failings of the post-war British far left – and the Grant and Healy traditions surely stand out here – has been its propensity for catastrophism.

Year after year, perspectives documents were premised on the idea that, however well world capitalism appeared to be doing, a full-on slump was just around the corner. And that economic crisis would catapult tiny groups into the political big time.

Personally I blame the Old Man, at least in part, given all his talk of ‘the death agonies of capitalism’ in the TP. There is no obvious reason to disbelieve the proposition that the capitalist mode of production is still capable of expansion for decades ahead.

That doesn’t mean there will not be downturns, however, and I suspect we shall be seeing one in 2007. On that note, here’s a couple of quotable quotes from the FT this morning. The first assessment comes from Neil Mellor, currencies strategist at the Bank of New York.

"An abundance of economic data out of the US last week produced evidence of weaker than expected inflation, weakening housing starts, declining wage growth, disappointing industrial production, ebbing consumer sentiment and falling leading indicators."

David Rosenberg, North American economist at Merrill Lynch, pitches in with the claim that markets might still be too optimistic on the US economic outlook.

He said he was concerned that the cycle of expansion was in a later stage than acknowledged by the consensus, which pegged the odds of a "hard landing" at 27 per cent. In contrast, Merrill's range of models indicated odds as low as 40 per cent and as high as 80 per cent.

"Practically every indicator at our disposal tells us we're very late-cycle, and the historical record strongly suggests the next wave after the Fed has inverted the yield curve is either a hard landing or a very bumpy soft landing," he said.

"The average business expansion over the past seven decades averaged 65 months in length and we're now in month 56."


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