Tuesday, 20 September 2016

Once again, the rosy view on U.S. economy wilts

In World Economy News 19/09/2016

A string of disappointing results on the U.S. economy in the past several weeks has all but ensured that interest rates will remain ultra-low for consumers and businesses for another few months.
Federal Reserve bigwigs meet this week to debate when to raise a key short-term U.S. interest rate. The outcome, however, is not expected to be a cliff-hanger. Wall Street investors only see a 15% chance that the Fed will hike rates.
The final nail in the proverbial coffin may have come with a decline in retail sales and manufactured goods in August, reflecting persistent caution on the part of consumers and businesses.
“The August data have nearly run the table to the disappointing side,” said Douglas Porter, chief economist of BMO Financial Group.
That’s not to say the economy is weak or that it would tank if the Fed gently nudged rates higher. After all, the benchmark fed funds rate sits near a modern historic low that ranges from 0.25% to 0.50%. Consumer and corporate loans are sensitive to changes in the fed funds rate.
All it means is the economy is not so strong that higher rates are a foregone conclusion. While consumers are spending at a moderate pace, businesses have scaled back investment amid a decline in profits. Energy producers, manufacturers and exporters have been particularly hard hit.
With so many key segments of the U.S. struggling, growth is like to average less than 2% in 2016, even if the economy speeds up in the final four months.
A small slice of economic bellwethers this week probably won’t alter the outlook. Housing starts, or new home construction, has been gradually increasing and so have sales of previously owned homes. The housing market is one of the strongest parts of the economy right now.
Yet sales and construction usually slow after kids go back to school as most families try to settle in before the new academic year. Rising prices and a shortage of available properties have also constrained sales even though more families are interested in buying a home.
The two-day meeting of the Fed, on Tuesday and Wednesday, will attract virtually all the attention on Wall Street this week. After the meeting, Chairwoman Janet Yellen could offer more clues on when the Fed will raise rates in her quarterly press conference.
For now, the Fed remains divided. Some senior officials believe the odds of the economy underperforming are much greater than the chances of it overheating. Certainly that’s been the pattern since the U.S. exited the Great Recession in the middle of 2009.
The rosier view takes into account a 4.9% unemployment rate, rising incomes and higher household wealth to support the notion that consumers will continue to carry the economy. The past two years has seen the biggest increase in consumer spending since before the recession.
Even that bit of good news is not entirely positive. Soaring rents and higher health-care costs are taking a bigger bite out of household incomes, according to an index that tracks the cost of living. Rents are rising at the fastest pace since 2008 and medical expenses posted the biggest increase in August since 1984.

Source: MarketWatch