02 Feb 2007 The Goldilocks Economy is Alive and Well

The strength of the U.S. economy continues to confound skeptics as well as optimists. The government released it’s first of three estimates on the overall growth of the economy on Wednesday. Even in the face of slumping housing gross domestic product climbed at a seasonally adjusted 3.5% annual rate in the fourth quarter, up from 2% in the third quarter. And even more noteworthy, it grew without inflation. The price index for personal-consumption expenditures posted its biggest drop in 52 years falling .8%. 

The Fed met this week and left its federal funds rate at 5.25%, the level it has held since last summer. Their statement recognized the strong fourth-quarter showing in GDP saying the latest data “suggested somewhat firmer economic growth” and even “tentative signs of stabilization” in the housing market. Importantly though they do not see the economy ready to take off as they stated that “the economy seems likely to expand at a moderate pace over coming quarters.” 

Today’s jobs data fell in line with the moderation theme as employers added a smaller-than-forecast 111,000 workers to payrolls in January and the unemployment rate rose to 4.6% from 4.5%. Economists and some Fed officials have worried that an increasingly tight labor market could add to inflation pressures. But this report eased those fears for now as wages increased less than expected last month. 

So the Goldilocks economic scenario remains alive and well. However, those hoping for an interest rate cut soon, may be disappointed as the economy looks healthy enough to give the Fed considerably more time before easing off the brakes. While saying that prices had “improved modestly in recent months,” they even asserted that additional data will determine “the extent and timing of any additional firming,” yes firming not reducing. At any rate, it appears the Fed will be on hold for several months.

So far it looks like corporate America continues to be healthy and wealthy too. With almost 20% of the companies in the Dow Jones Wilshire 5000 Index reporting, corporate earnings are up and average of 12% on continuing operations. Big winners include Containers & Packaging, Real Estate Holding & Development, Computer Hardware, and Business Support Services. Losers include Recreational Products, Heavy Construction, Oil and Gas Pipelines, and Nondurable Household Products. Top performing indexes for the month of January were Real Estate Trusts, Medical Equipment, and the Dow Jones Transportation Average. 

We’ll keep you posted, but for now things look to be stable. Equity markets are reasonably valued for modest to outsized gains in 2007, international opportunities continue to exist in Europe, Latin America, and the East. And finally, according to experts, interest rates should be trending down in the coming months.