Down But Not Out, U.S. Economy Still a Beacon of Growth

Down but not out, U.S. economy still a beacon of growth
Provided by MarketWatch

The United States is still a sheltered harbor in a world of economic tossing and turning, but fresh worries about the way forward are likely to keep the guardians of U.S. growth — aka the Fed — on edge.

A handful of bigwigs at the Federal Reserve will weigh in this week on the economy and the prospect of higher interest rates in 2016. Key members of the central bank were worried enough about a big drop in U.S. stock markets in January to put off another rate hike for a while.

Stocks rallied last week and that could ease some of the concerns. Fed officials still want to see more evidence the U.S. economy is recovering from a fourth-quarter dip when growth sagged below 1%.

Don’t expect a bevy of reports this week to show the economy has found its sea legs.

Sales of new and previously owned homes are forecast to dip in January. Consumer confidence has plateaued after recently touching post-recession highs. Businesses probably increased investment, but the longer-term trend is weak. Even consumer spending, which likely rose in January, did so in part because households spent more on heating as temperatures turned frigid.

For all the recent difficulties, though, the U.S. is growing and creating plenty of new jobs unlike many other countries around the world. Japan might be in recession again. Europe isn’t doing much better. Even China is grappling with the slowest growth in years.

Fed takes foot off pedal 

The hesitancy of the Fed was illustrated last week in a speech by St. Louis Fed President James Bullard, an ardent supporter last year of raising interest rates who’s suddenly gone cold on the idea.

Senior economist Michael Gapen of Barclays said Bullard’s turnabout “reflected a starkly dovish tone.”

Other Fed VIPs this week, especially Vice Chairman Stanley Fischer,  may take a more measured tone in an effort to soothe investors and financial markets.

It will take more than just reassuring words, however, and the first wave of economic reports for January and February have been decidedly mixed. That’s unlikely to change this week.

Home sales, for example, likely slowed in January after finishing 2015 on a strong note. Cold weather and a big snowstorm in the eastern U.S. probably played a part.

Yet a steady increase in permits to build new homes suggest a pause won’t last long. Mortgage rates are still very low and the economy continues to generate an average of more than 200,000 new jobs a month, giving more families the financial means to buy despite rising prices.

More worrisome is weak business investment. Companies cut back toward the end of 2015, and with profits flat, many executives talked of tighter budgets after releasing fourth-quarter results in January and early February.

“This has been the weakest business expansion in history,” said Michael Gregory, deputy chief economist at BMO Capital Markets.

A rebound in auto sales in January, along with higher bookings for jumbo jets, will likely boost orders for durable goods. But underlying investment is pitiful. Orders for so-called core capital goods fell 7.5% in 2015 to  mark the first drop in three years.

The 2016 presidential election probably won’t make executives any bolder, some economists say. Leading candidates for both parties are promoting policies that many businesses consider harmful.

Perhaps the best news in January is that consumers spent a lot more. Economists polled by MarketWatch predict a 0.4% increase in consumer spending last month.

The catch? Some of the increased stemmed from higher utility bills, not exactly a sign consumers were feeling more confident. Confidence has leveled off after hitting an eight-year high last year.

Written by Jeffry Bartash of MarketWatch

(Source: MarketWatch)

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