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A Choice of Two Head Fakes

The recent economic weakness in the U.S. isn't a temporary anomaly before a return to robust growth, but a cyclical slowdown in the economy's growth rate, says the Economic Cycle Research Institute.

ECRI, a private research group that monitors business cycle behavior in the U.S. and 19 other countries, said in a report to clients that "since the Spring, ECRI's array of leading indexes has been predicting a broadbased deceleration in the growth rate of the (U.S.) economy" and that "growth will continue to ease through year-end, making a quick return to robust growth unlikely."

However, the group was quick to point out that despite the deceleration in the growth rate there's no indication from its leading indexes of a new recession.

At the same time, ECRI concludes that based on analysis of its U.S. Future Inflation Gauge, underlying inflation pressures remain well above the lows seen in late 2003.

The ECRI economists say the majority of analysts are too optimistic in believing that the only thing wrong with the economy is high oil prices. "The reality is that underlying inflation pressures have not yet turned down decisively."

Policy makers - including those at the Federal Reserve - have tended to argue the same line as many private sector economists, with the Federal Open Market Committee calling higher energy prices "transitory" in the statement that accompanied its Aug 10 interest rate hike.

Casting some doubt on that certainty Monday, Dallas Fed President Robert McTeer said "petroleum products are in many, many things and it is very important and it's troublesome, both in adding to price pressures and in adding to weakness overall."

Unexpected weakness in payrolls growth in June and July - coupled with sluggishness in other data - has cast a shadow over the U.S. economic outlook.

Some analysts have pointed to the rebound in certain economic data, such as industrial production, in July from June as evidence of a return to more robust growth. But ECRI said the unsurprising rebound "from unusually weak readings is the real head fake obscuring the underlying downturn in economic growth."

The business cycle institute said essentially there is a choice of two head fakes.

"Either the recent weakness is an anomaly temporarily masking the strength in the economy, or the modest but predictable rebound in the numbers is misleading analysts who are still reluctant to concede the reality of the slowdown."

ECRI produces a weekly leading index that for some time has been indicating much slower growth in the U.S.