The Fed Chairman eloquently outlined the two camps that have formed on the outlook for the US economy in his semi annual Humphrey Hawkins testimony: 1) soft landers, and 2) those who view the second quarter growth slowdown as a "pause". The overall tone of the speech was "balance", and the streets interpretation of that was bullish (higher prices/lower yields). The Chairman refrained from any elaboration on the state of the New Economy, as has been the case in his most recent speeches. Instead, he kept the comments focused on more Old Economy saying that for some time now the "growth in aggregate demand had exceeded the expansion of production potential", and so far p [productivity gains were outstripping any potential pressures on the labor market. At the very beginning of his speech, he outlined the current debate going on on the Street, between the "soft landing" proponents, and those who believe growth has only "paused" in the second quarter, and will reaccelerate later this year. The Chairman also commented about the current account deficit and the state of the labor market. As for the deterioration in the current account deficit, the Chairman noted, "there are limits to how far net imports-or the current account deficit-can rise or our pool of unemployed resources can fall". "As a consequence, he said, the excess of growth or domestic demand over potential supply must be closed before the resulting strains and imbalances undermine the economic expansion that now has reached 112 months, a record for peace or war". With respect to the labor situation, he reiterated what he has said over the last six months, "there is a limit to the continuing drain on our unused labor resource-short of repeal of the law of supply and demand, labor costs eventually would have to accelerate to levels threatening price stability and our continuing economic expansion."

The equity market is getting what it wants, a soft-landing, but now fears the results. Despite some very strange looking economic data-including an unexpectedly strong 5.2% gain in second quarter GDP-the evidence still points to moderation in growth and a lack of inflation pressure. The most striking aspect of the second-quarter GDP report was the yawning gap between consumer and business spending. While consumer spending has clearly moderated, capital spending remains extremely strong. Consumer spending rose at only a 3% rate in the second quarter versus a 7.6% pace in the first quarter. In contrast, capital spending on equipment and software rose at a 21% rate in the second quarter and was up 17% from a year ago. Technology spending rose at a breathtaking 31%. Industrial equipment spending rose at a 16.5% rate.