22 Sep 2006 How Gentle Our Landing?
No one doubts the economy is slowing, but there is mounting debate as to how fast; will we get the “soft landing” that is hoped for or something more disruptive? Just a month or two ago the worry was that continued economic growth combined with tight labor might spark inflation. So far that has not happened. The most recent report of prices paid at the producer level released Tuesday showed a drop of .4%, well below expectations.
Lately though, the data coming from the government is not as balanced as it was. Much of it points to a slowdown with housing is leading the retreat. While housing had to slow from its breakneck pace, it is hoped that the slowdown won’t completely stall consumer spending.
Business may hold the line, but there are some concerns surfacing here and there. The Philadelphia Fed reported yesterday that its business conditions index moved to a reading of -0.4 in September, versus the 18.5 where it stood the month before. It was the first contraction in more than three years, according to the WSJ. Also yesterday the Conference Board released its index of leading indicators which also fell by .1%. It is down five out the last six months.
As the global economy improves and expands so does our trade deficit. The Commerce Department said the deficit grew, but not as fast as earlier quarters. According to the WSJ expensive foreign oil contributed, while consumers snapped up more foreign cars, television and clothing. Broadly, the current-account gap accounted for 6.6% ofU.S.gross domestic product, down from earlier in the year. The Treasury Department reported that foreigners bought a net $32.9 billion in U.S. securities in July, down 56% from June’s $75.1 billion and the lowest net purchases in more than a year.
The Federal Open Market Committee maintained the benchmark interest rate at 5.25%, asserting that the moderation of U.S. economic growth “appears to be continuing, partly reflecting a cooling of the housing market.” The Fed also implied that industry might be growing slowly enough to require fewer resources and labor, keeping a lid on prices. But, the Fed repeated its warning that “high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures,” and said its members judge that inflation risks remain.
We believe the Fed is finished with rate increases and that they will begin easing them early to mid next year, depending upon the economy’s cooling speed. Corporate earnings in key areas continue to be quite good. Database software giant Oracle and banking giant Morgan Stanley came out with strong reports on Tuesday. Yesterday FedEx announced a 40% jump in earnings. With their ability to track every package they ship throughout world they can give a pretty good read on the pace of the global economy. Frederick W. Smith, FedEx’s chairman, said the global economy “is growing at a healthy pace with theU.S.economy growing at a moderate, sustainable rate.” We hope he’s right.
