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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Oil, Interest Rates a 1-2 Punch?


The U.S. economy rode out $55 a barrel oil last fall. But some economists say that the latest spike in that key commodity poses a greater threat to the nation's economic growth.

Those economists say that the combination of rising oil and rising interest rates constitute a one-two punch for the economy that will be much harder over overcome.

Last September and October, as oil shot up more than 25 percent to $55 a barrel in less than two months, interest rates fell. The yield on the 10-year treasury bond declined 6 percent in that period.

With that low rate environment, the nation's gross domestic product grew at 4.0 percent annual pace in the third quarter and 3.8 percent in the fourth quarter, even in the face of rising oil prices and imports. That was better than the 3.3 percent growth rate seen in the second quarter.

But the current spike in oil prices has come at a time when the 10-year yield is rising up 12 percent in the last month while oil prices climbed 21 percent...

These warning signs come at a time when there are a number of new economic projections showing an improving outlook for growth in 2005. And some economists still believe the economy is resilient enough to grow faster, even in the face of the oil and interest rate pressures. "Growth is more likely to firm modestly from here and it's quite unlikely to ease much further," said Anirvan Banerji, director of research for the Economic Cycle Research Institute. He said 5 percent GDP growth might be out of reach but he would expect better growth than at the end 2004...