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Barclays Guru: Economy Speeding Up

Wednesday, 16 Jul 2008 02:48 PM

Ignore what you see happening in the financial markets. In the real economy, things are picking up, not slowing down, says Barclays' Chief U.S. Economist Dean Maki.

"Certainly there are stresses and strains — and economic growth did slow somewhat over the past couple of quarters," Maki told CNBC.

"But it hasn't slowed nearly as much as many people expected, and it looks as if growth is actually picking up in the second quarter."

"We think that will be sustained into the third quarter."

Consumer spending is picking up, Maki points out, and while some of that is due to the tax stimulus, part of it preceded the stimulus check mail out.

"We're also seeing business investment spending pick up," Maki notes, "and trade is making a very significant contribution as well."

While acknowledging that his view is counter-intuitive, Maki says the facts support it — even in a world of $4 per gallon gasoline.

"Right now, incomes are rising at the fastest pace in 33 years, and that's precisely because of the tax rebate checks," Maki says.

One of the concerns prior to those checks being issued, Maki notes, was that consumers had lost so much confidence in the economy that they would use their checks to pay bills or just tuck them into banks instead of spending them.

"That's turning out not to be the case."

Maki agrees that future government deficits are growing, even though the figures aren't showing up on current balance sheets.

That's because much of the deficit has been pushed to the future. For instance, General Motors will no longer provide health coverage for its retired workers over 65. Those workers instead will have to move to government-financed Medicare.

Where the money will come from to cover these futures costs is "one of the questions that has to be resolved through the policy process," Maki says.

"What we're seeing in the data now is that government deficits are rising, but most of these activities aren't going to be showing up immediately on any balance sheets."

Responding to concerns that the government will simply print more money to pay for these future debts, Maki said that financial market strains in general will keep the Fed in "too easy a state of policy for too long."

"That's a real risk here," Maki observes. "We are looking to determine Bernanke's testimony for how the Fed is likely to navigate this mixture of increasing inflation pressures at the same time we have financial market strains."

Maki isn't alone in seeing a silver lining in the current dark economic clouds. Ladenburg Thalmann analyst Richard Bove agrees things are better than they may appear.

"In the early 1990s, deposits were leaving the banking system," Bove points out. "Now they're coming in at a faster rate than is average, and capital in the banking system is up substantially."

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Ignore what you see happening in the financial markets. In the real economy, things are picking up, not slowing down, says Barclays' Chief U.S. Economist Dean Maki."Certainly there are stresses and strains — and economic growth did slow somewhat over the past couple of...
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