Thursday 1 February 2007

Fed holds rates as slowdown vanishes

The Federal Reserve left interest rates unchanged yesterday; that was not a surprise. US fourth quarter GDP growth hit 3.5 percent; that was a surprise. Reuters reports:

The U.S. economy grew at a stronger pace than expected in the final quarter of 2006 without raising inflation pressures, government data showed on Wednesday, as robust consumer spending more than offset the biggest slump in housing in 15 years.

That report was followed by Federal Reserve policy-makers' decision later on Wednesday to keep the benchmark overnight federal funds rate steady at 5.25 percent. The Fed again warned about the risks of inflation but also pointed to some signs of a stabilizing housing market.

Gross domestic product, the broadest measure of overall economic activity within U.S. borders, expanded at a 3.5 percent annual rate during the October-through-December quarter, according to the Commerce Department...

Business investment during the quarter fell 0.4 percent, breaking a streak of 14 consecutive quarterly increases.

But aided by lower energy prices as well as strong growth in real wages, consumer spending advanced at a 4.4 percent rate in the fourth quarter...

On the inflation front, the central bank's favorite measure of nonfood, nonenergy inflation -- the so-called core personal consumption expenditures price index - moved ahead at just a 2.1 percent rate, down from the 2.2 percent seen in the prior quarter. That was just slightly above the top of the range many Fed officials have identified as their "comfort zone."

Among other US data released yesterday:

The National Association of Purchasing Management-Chicago Index showed a reading of 48.8, which was well below expectations and pointed to a contraction for business in that region...

A separate Labor Department report showed that employment costs -- another piece of the economy's pie that inflation-wary Fed officials are watching -- rose a less-than-expected 0.8 percent in the fourth quarter.

Bill Conerly at the Businomics Blog analysed the GDP report and remarked that it "smelled like a rose". Nigel Gault at Global Insight called it a "Goldilocks Economy" and adds the following summary:

The overall 3.5% outcome was generated by a mixture of big positives and some big negatives. Overall domestic demand growth slowed, from 2.0% to 1.7%, but in effect the United States passed on the demand softness to the rest of the world, as imports declined. Meanwhile, the rest of the world propped up U.S. production growth through surging export demand. This is the reverse of the picture to which we have become accustomed—instead of the United States propping up the global economy, the rest of the world is now supporting U.S. growth.

Meanwhile, the FOMC statement was analysed by Mark Thoma, who finds it "a bit of a departure from the Fed's last few statements", and William Polley, who concludes that there will not be any change in rates for some time.

Meanwhile, there was also no sign of accelerating inflation in the euro zone. AP/CNBC reports yesterday's data from Europe.

Euro inflation stayed at 1.9%, the same as the previous two months, while unemployment in the 13-nation euro area hit a new record low, falling to 7.5% in December from 7.6% a month earlier, the EU statistics agency Eurostat said...

However, unemployment in the entire 27-nation EU remained stable at 7.6%...

Euro confidence went down to 109.2 from an October high, while the EU figure fell to 110.7% from its November peak. The economic bellwether is still above its historic average though, the Commission said.

And over in the UK, consumer confidence improved in January, reports Reuters.

Research company GfK NOP's monthly consumer confidence index improved to -7 in January, above forecasts for a deterioration to -9 and better than December's -8 reading.

But following the data earlier in the week, the outlook for Japanese consumer spending continues to be poor. Bloomberg reports that Japanese workers can only afford to buy more beer.

Japan's wages fell at the fastest pace in 16 months in December as companies paid lower winter bonuses, signaling consumer spending may remain too sluggish for the central bank to raise interest rates.

Monthly wages, including overtime and bonuses, unexpectedly fell 0.6 percent from a year earlier, the labor ministry said today in Tokyo. Workers brought home an extra 5,500 yen ($45) in total pay in 2006, about enough to buy a case of beer.

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