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Feeding the Economy
PREVIOUS ISSUES
The latest quarter-point rate cut will be the last downward move by the Federal Reserve for at least a few months as it assesses the rising specter of inflation amid signals that the economy will pick up during the second half of this year.
Members of the Federal Open Market Committee realize the inflation threat may be more ominious to future economic stability than the slowdown in economic growth. However, they left the door open to further rate cuts this year -- if needed.
The rate cut puts the benchmark Fed funds rate at 2%. Commercial banks will follow the Fed's action by trimming their prime lending rate to 5%, which will help lower adjustable rate mortgages and home equity lines of credit as well as small business loans that are tied to the prime rate.
The Consumer Price Index in March was up 4% over the previous 12 months -- much too high for the Fed. Until now, chairman Ben Bernanke had tilted toward risks of a recession and credit market turmoil as more important than rising prices.
But ...
Don't be too heartened by the news that the economy didn't shrink last quarter. What looks like good news actually signals deeper trouble ahead. Thank inventory growth for the positive first-quarter growth in Gross Domestic Product (GDP). If it weren't for that jump, which contributed about an eight-tenth of a percentage point to GDP, the 0.6% overall growth rate would have been negative. But that means, during this quarter, businesses will work through the inventory piled up on shelves of stores and warehouses, rather than order more goods, cutting into second-quarter GDP growth.
The positive first quarter belies the fact that the economy is in a mild recession. The key yardstick is employment, and in that respect, the picture isn't pretty. There has been a net job loss of about 230,000 in the first three months of the year. Friday's employment report is likely to indicate that another big chunk of jobs evaporated in April.
Moreover, total consumer spending rose a paltry 1% over the January-March period, compared with an increase of 2.3% in the fourth quarter of last year. Spending on durable goods declined by more than 6%. Previous quarter, spending on cars, appliances and other durables rose about 2%. In another sour note, business investment fell 2.5%, after racking up a 6% gain at the end of 2007. And housing remains a giant drag, with residential construction again shrinking more than 25%.
On the positive side, growth in consumer spending on services picked up from 2.8% in October-December period to 3.4% in January-March. And exports continued to increase, though the 5.5% pace was slower than previous quarter.
We continue, however, to anticipate an economic upturn in the third quarter. Tax rebate checks, just beginning to hit the mail, will help, starting this quarter, though it's not clear how much. Many taxpayers will use their checks to pay off debt or to boost savings. In 2001, consumers saved more than half of their rebate checks, diluting the intended stimulative effect. With food and gas prices soaring, the extra cash won't pack as much wallop either. But by summer, the Federal Reserve's series of interest rate cuts should spur more growth as well. In the end, we expect a very modest 1% growth rate for the year, compared with 2.2% gain in 2007.
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POSTED BY: Puny Jim (May 01, 2008 11:44 AM)
The Fed cannot be expected to carry the weight of this "spend more money than any Administration in history" alone. Until we get some fiscal sanity in the White House and Congress we are going to pay the consequences in higher fuel prices, inflation and high unemployment. If something isn't done soon we're looking at an inflationary depression right in the face. Batten down the hatches.
POSTED BY: Dale (May 01, 2008 01:58 PM)
You all certainly must know the definition of "recession"- how about using it? I expect better journalism of you guys.
POSTED BY: Johnny Jabroni (May 02, 2008 10:09 AM)
We aren't in a recession. Don't use the word if you don't know what it means.
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