Although jobs declined for a third straight month, the rise in hourly wage rates was still 3.6 percent higher in March than a year earlier. The slow economy, therefore, is not slowing the primary source of inflationary pressure. Slow growth causes problems. An uptick in inflation causes problems. The combination is about as severe as economic conditions can get. And the combination is evident, although at different degrees, on both sides of the Atlantic.
Trade remains the one bright spot in the U.S. economy. Job losses, falling confidence, and soft retail spending represent weak spots. The only question is how weak and for how long. It might not get much weaker, but it could take all year or longer before the momentum shifts towards more robust growth. Until then, squeezed margins suggest stock prices will remain under unrelenting pressure, and not just domestically. Indeed, falling stock prices, rising retail prices, and pressures on margins could result in less overall global economic growth.
The world's economy grew by nearly 5 percent in 2007, and will struggle to grow by 4 percent this year. With Leading Economic Indexes across the globe generally declining over the past six months, it's crystal clear that the world economy is losing a little steam. There is a world of difference however, between losing steam internationally, and potentially grinding to a halt domestically.
For example, the Tankan (business sentiment) survey suggested that weak sales in Japan are forcing cutbacks in previously relatively aggressive investment and hiring plans. That moderation compares with domestic investment growth which is close to zero, and outright job declines. Overall, Japanese economic growth this year could be about 2 percent or at least twice as fast as the domestic economy.
