Friday, August 04, 2006

The Fed Will Pause

Today's jobs report significantly increases the odds that the Federal Open Market Committee won't raise rates when it meets on Tuesday. Non-farm payrolls increased by just 113,000 in July, which was weaker than the 135,000-145,000 expectation. In addition, the unemployment rate edged up to 4.8% from 4.6% in June, and hourly earnings increased by 0.4%, which was slightly greater than expected.

The latest GDP report already provided strong evidence that economic growth is slowing. Today's data virtually guarantees no rate hike on Tuesday. However, like I said in the August issue of the Forbes Growth Investor, the Fed won't be pausing because it licked inflation. If it pauses, it will be because it is concerned that economic growth is slowing too much. This isn't something to cheer.

Although some economists are already predicting a coming recession, I still believe growth will continue. Unfortunately, it won't be at the healthy rates many had been predicting. That's one reason why I remain bearish on stocks.

I continue to believe high energy prices will cause significant problems in coming months. The good old days of $20-30 oil are gone. I have to admit I am surprised by how well consumers have held up so far with oil at $70. But I'm convinced prices this high will soon take a toll.

Perhaps the latest Starbucks report is a harbinger of things to come. Starbucks (SBUX) reported disappointing growth and the stock took a big hit. Management blamed it on too much demand for blended drinks that take a long time to prepare. That's unique. Growth slowed because demand was too strong. With gasoline prices pushing north of $3 per gallon, I suspect the real story is that consumers are wondering how much sense it makes to pay $16 a gallon or more for coffee.

For those of you who like to wake up very early, you can hear my comments about the Fed's upcoming meeting on Tuesday morning on ABC's World News This Morning. I'll be on about 4:30 am. Yes, it's live. No, I won't be drinking Starbucks.