Can the U.S. Consumer Beat the House? When the Fed Ended Its Historic Series of 17 Consecutive Rate Increases One Year Ago, There Was Some Expectation They Might Move Economic Policy from the Stick to the Carrot. but for Every Positive Economic Sign There Seems to Be an Equal and Opposite Negative Sign Keeping Policy Steady

By McMahon, Chris | Futures (Cedar Falls, IA), July 2007 | Go to article overview
Save to active project

Can the U.S. Consumer Beat the House? When the Fed Ended Its Historic Series of 17 Consecutive Rate Increases One Year Ago, There Was Some Expectation They Might Move Economic Policy from the Stick to the Carrot. but for Every Positive Economic Sign There Seems to Be an Equal and Opposite Negative Sign Keeping Policy Steady


McMahon, Chris, Futures (Cedar Falls, IA)


In early May. Federal Reserve Bank Chairman Ben S. Bernanke and the Federal Open Market Committee unanimously voted to keep the Federal Funds rate unchanged at 5.25%, where it has sat since June 29, 2006. The Fed cited two primary concerns: slowing economic growth and "somewhat elevated" core inflation. First quarter gross domestic product was revised down to 0.6%, dragged down by the housing slump; and core inflation, the rate of price increases in consumer goods not including food and energy, remains higher than the Fed's target rate of 2.1%.

[ILLUSTRATION OMITTED]

The slow-down in the U.S. economy is real. And while the poor first quarter numbers may have been a temporary aberration, with a mixed bag of economic statistics and a markedly weaker U.S. dollar, the big picture is certainly more complicated than many people would hope. But it's not all bad news on the U.S. economy.

Jon Silvia, chief economist for the Wachovia Corp., says that the decline in first quarter GDP was a "short-term blip," caused by a substantial inventory adjustment and a higher than expected trade deficit, which came in at nearly $64 billion. "People were buying, they just weren't buying enough," Silvia says, adding that both retailers and wholesalers ended up with too much inventory.

The following inventory sell-off, combined with slightly easier prices then contributed to the downward pressure on the rates of inflation. "Looking forward, if you have good sales but your inventories have declined, that's actually a positive for economic growth. So you will see a lot people who talk about 1% [first quarter] GDP also talking about 2% to 2.5% in the second quarter," Silvia says. And so far, the Institute for Supply Management Index, which tracks manufacturing productivity, has been steadily above 50, indicating economic expansion, with the exception of January, when the ISM dipped to 49.3.

"What we have in April is a return to 54.7," notes Joseph Trevisani, chief market analyst at FX Solutions LLC. "The last time the number was that high was last July. The new orders were even higher, at 58. Those numbers are great. You have a pattern bottoming out in the first quarter, but that is as preliminary as it gets," he says, noting that the same pattern is evident in the non-manufacturing number, which came in at 56. "It's better than it has been, and also a better number than expected."

BRINGING DOWN THE HOUSE

The housing market is in the midst of a large and painful correction, and as per Bernanke's Congressional testimony, the housing market is the number one significant risk to the Fed's economic outlook for the second half of the year (see "Show me where it hurts," page 28).

"The pattern of building permits clearly shows that the dramatic downward correction in housing production still is underway," said David Seiders, chief economist of the National Association of Home Builders.

"Home buyer demand has been sent into another down leg by the abrupt tightening of mortgage lending standards, and there is an increasingly heavy supply of vacant housing units on the market. Under these conditions, builders are cutting back on new construction and intensifying their efforts to bolster sales and limit cancellations."

Kim Rupert, managing director of Action Economics, says, "The declines are hurtful and onerous, but to the overall economy it has been a speed bump." But longer term, she anticipates more pain, noting that the NAHB/Wells Fargo Housing Market Index dropped to 30 from 33 in April, indicating the lowest level of builder confidence since September 2006. "We are not out of the woods yet, but the market doesn't crumble," she says, pointing out that non residential building growth is up 6% to 8%.

WHEN DOES IT END?

The implications of the housing market collapse could be large and have wide impact on the economy, as construction employs 5% of all American workers and could damage the lending industry, with sub-prime lenders especially at risk.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Can the U.S. Consumer Beat the House? When the Fed Ended Its Historic Series of 17 Consecutive Rate Increases One Year Ago, There Was Some Expectation They Might Move Economic Policy from the Stick to the Carrot. but for Every Positive Economic Sign There Seems to Be an Equal and Opposite Negative Sign Keeping Policy Steady
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?