The global economy, although slowing a little, has more momentum. To be sure, growth expectations have been trimmed for Europe, as Leading Economic Indicators generally point to somewhat slower growth ahead. This runs counter to the improvement in business confidence in Germany. Growth prospects in Asia are also being lowered, largely the result of some estimates for India.
A fourth straight weak labor report would support the view that the domestic economy is in recession or will be in one very soon. Moreover, further interest-rate cutting is unlikely to dramatically change the course of the economy. As noted above, consumers are now too nervous to spend all the money they could. The belt tightening in household budgets is especially pronounced in big-ticket items, the very spending than consumers tend to finance. The question, then, turns to how long will this go on. It is beginning to become apparent that conditions are unlikely to quickly turn around.
Higher inflation, not slower growth, is the big concern elsewhere in the world. Energy prices will have a lot to do with how this plays out. Getting back under $100/bbl for crude oil is looking less and less likely. Getting food price increases to slow is perhaps even less likely. But maintaining moderate economic growth in the global system is possible despite these pressures. Less clear is the impact higher inflation will have on profits going forward — and not just a return to healthy financial markets, but less volatile market behavior.
