Another point in favor of the goldilocks camp...

Yesterday's labor cost and productivity figures for Q1 of this year suggests that the economic slowdown is having an impact on inflationary pressure. Productivity growth typically neutralizes the inflationary impact in an environment of rising labor costs, thereby helping to sustain an economic expansion. In the current environment, confronted with a slowing economy, better than expected productivity rates combined with a slight rise in unit labor costs is considered good news, and should help sooth stagflation fears. If, going forward, economic indicators continue to confirm this trend, it will provide the fed with greater room for manoeuvre in terms of easing rates to counter the slowdown. Recent housing figures suggest that the debacle is not over yet and the risk of it spreading elsewhere in the economy continues to pose a material threat. We have already seen an impact in today's employment figures. On the other hand, despite the recent downturn in capital expenditure, corporate earnings remain relatively strong (in the upper single digits), helped in part by strong growth outside of the U.S. and a weakening dollar. The direction for the economy at this stage is clearly at crossroads.