Chief RGE Monitor Lead Analyst and Managing Editor Christian Menegatti expects the economy will make a U-shaped recovery.
“We’re definitely looking at an economy that is showing signs of recovery,” Menegatti told Dan Mangru of Newsmax TV Money.
“We don’t think we’re in a position for the economy to show a V-shape.”
“The worst is over,” Menegatti says. “We … were losing 700,000 jobs per month back in January, now we’re losing less than 300,000, so things are definitely improving.”
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However, Menegatti sees several things that portend some risks of a double dip.
“Losing 250,000+ jobs per month is still a very, very high number, a considerable vulnerability,” he pointed out.
“The labor market is not stabilizing yet and that’s still an important weakness for the economy that will haunt us for some time.”
Also, Menegatti thinks that housing prices can still drop.
RGE’s formal model, which incorporates the latest data on the demand side, shows that home prices are close to if not at the bottom — but demand has been pushed by the incentive of an $8000 credit for first-time homebuyers.
“Our fear is that this demand strength we have seen lately was a temporary phenomenon that will wane once this tax credit will expire,” Menegatti says.
“Inventories have come down a little bit, but are still considerably high, which is going to put further downward pressure on prices, so I’m afraid we’ll see prices falling a little bit more.”
There are risks of inflation, Menegatti notes, exacerbated by monetization of the deficit.
But the Federal Reserve has been extremely aggressive in its easing policies, and Menegatti believes it will continue to be aggressive and to maintain zero interest rate policy for the foreseeable future.
“Clearly, central banks have the tools to manage inflation and could be successful in preventing high inflation rates,” Menegatti points out.
“We don’t think we are going to see high inflation rates; however, there is definitely a risk which is related to the timing of the removal of easing in monetary policy at this point. That’s going to be very difficult to get right.”
As to the health of the U.S. dollar: Menegatti expects there will be “an orderly diversification toward non-dollar denominated assets” on the part of other countries. “That’s a trend that has been there for some time,” he says.
“Clearly the dollar has proven again to be a safe haven during the crisis. There is less interest in dollar-denominated assets once the crisis starts showing signs of ending.”
“I don’t see a particular trend away from the U.S. dollar yet.”
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