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Video: Silvia: Recovery Ahead, Inflation, Too

By    |   Thursday, 06 Aug 2009 01:50 PM

Wells Fargo chief economist John Silvia says the economy is rebounding, but he is concerned about inflation.

“I think it (the recession) is winding down,” he tells Moneynews.com's Dan Mangru in an exclusive interview.

“I think we’re in an economic recovery. We’ll know that when we see some of the GDP numbers for next quarter.”

The second quarter GDP figures showed “a pickup in domestic demand across a lot of different sectors,” Silvia says.

“It’s still fairly weak in some (sectors), but especially there’s some momentum going forward, and that was absolutely key.”

Silvia is cautiously bullish on housing. “In most of the United States we’ve hit bottom,” he says.

“We’ve seen new home sales improve a little bit. We’ve seen existing home sales improve a little bit. Housing prices are fairly stable. It seems like there’s that upswing happening. It’s not as strong as in prior recoveries, but there is definitely some movement upward.”

As for the job market, “The issue with unemployment is it impacts consumer confidence as well as consumer income,” Silvia says.

“The high unemployment numbers that we see right now really are impacting consumer confidence. The effect on the economy is that consumers won’t spend as much as they may have in the past,” he says.

“So while the consumer will help the economy grow over the next two to three years, that pace of growth will be far below what we’ve become accustomed to in prior economic recoveries.”

On the inflation front, things are quiescent now. “But as the economy recovers, people have a sense they want to put the money to work,” Silvia says.

“Often it comes at that point, which for us may be mid-2010, when the money really starts going through the financial system, … that the upward pressure on inflation starts to happen.”

Silvia doesn’t anticipate inflation will jump like in the Jimmy Carter era, when it hit 15 percent. “All we’re looking at is if inflation moves a little bit from 2 percent to 3 or 3 ½ percent, a lot of those Treasury bonds people are buying … are really after inflation going to be negative in terms of total return,” he says

“The challenge we have in our society is that we’re so set to a fairly low inflation rate, let’s say 2 percent or so. As inflation moves up, it has real economic effects.”

Addressing the issue of China’s Treasury holdings, Silvia says, “You have a sense that as inflation creeps up, the Chinese are going to demand a higher interest rate to compensate for the inflation risk. As they do that, all U.S. interest rates will start to rise.”

Bottom line: “That will dampen the economy a little bit.”

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Wells Fargo chief economist John Silvia says the economy is rebounding, but he is concerned about inflation.“I think it (the recession) is winding down,” he tells Moneynews.com's Dan Mangru in an exclusive interview. “I think we’re in an economic recovery. We’ll know that...
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2009-50-06
Thursday, 06 Aug 2009 01:50 PM
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