Will the Fed's liftoff be grounded?

The Pak Banker - - OPINION - Robert J. Sa­muel­son

For many months, econ­omy-watch­ers have been ob­sessed with "liftoff": the mo­ment the Fed­eral Re­serve raises short-term in­ter­est rates, which have been held close to zero since late 2008. Fed Chair Janet Yellen has in­di­cated that, if the econ­omy grows as it has, that mo­ment would come "at some point this year" - gen­er­ally taken to mean ei­ther the Septem­ber or De­cem­ber meet­ing of the Fed­eral Open Mar­ket Com­mit­tee, the Fed's key de­ci­sion-mak­ing body.

Frankly, I've as­sumed that it's a done deal. The econ­omy seems to be grow­ing solidly, if not spec­tac­u­larly. Af­ter a rough win­ter, gross do­mes­tic prod­uct (GDP) in­creased at a 2.3 per­cent rate in the sec­ond quar­ter; this may be re­vised up­ward. The un­em­ploy­ment rate is 5.3 per­cent, and pay­roll jobs have risen at a monthly av­er­age of 243,000 for a year. Now, I'm hav­ing sec­ond thoughts. What prompts my doubts is a re­cent re­port from Eco­nomic Anal­y­sis As­so­ci­ates. You've prob­a­bly never heard of EAA, which is a two-per­son shop run by Su­san Sterne and her hus­band, Lawrence. They spe­cial­ize in con­sumer spend­ing, which ac­counts for slightly more than two-thirds of U.S. GDP. As the con­sumer goes, so goes the econ­omy. The Sternes's latest re­port is down­beat - a sur­prise to them.

They regularly dis­sect con­sumer spend­ing on dozens of cat­e­gories of goods and ser­vices, rang­ing from air­fares to day care to used ve­hi­cles. They com­pare spend­ing in the most re­cent month with the pre­vi­ous month. The re­sult for June was stun­ning: Spend­ing was down in 87 of 122 cat­e­gories. "I have never seen any­thing quite like this" - noth­ing so one-sided, says Lawrence Sterne, who has over­seen two decades of these com­par­isons. Typ­i­cally, he says, spend­ing on durables (long-last­ing items such as cars, ap­pli­ances and fur­ni­ture) fluc­tu­ates, be­cause big pur­chases can be de­layed, while spend­ing on non­durables (food, ga­so­line, cloth­ing) and ser­vices (res­tau­rant meals, ca­ble TV, elec­tric­ity) is more sta­ble. Now, all cat­e­gories seem to be soft­en­ing. Ei­ther "the con­sumer [is] much weaker than gen­er­ally thought," he writes, "or the data is very, very bad." (The data come monthly from the U.S. Bureau of Eco­nomic Anal­y­sis.)

If the con­sumer weak­ness is real, its causes are un­clear, says Su­san Sterne. She doubts that Amer­i­cans are re­act­ing to for­eign eco­nomic crises. "It's not China or Greece," she says. "The av­er­age Amer­i­can on the street isn't dwelling on China or Greece." What's es­pe­cially wor­ri­some, she says, is "hous­ing ar­eas of spend­ing are weak­en­ing - fur­ni­ture, small ap­pli­ances, build­ing ma­te­ri­als." That could sig­nal that home sales and con­struc­tion will pro­vide less sup­port for the re­cov­ery. Of course, all this could be a sta­tis­ti­cal mi­rage. It's only one month's data, and the fig­ures on weak­en­ing sales that I've cited need to be qual­i­fied. First, the data re­flect unit vol­umes of sales (say, the num­ber of cars sold) and not dol­lar amounts; when prices are in­cluded, the data are less lop­sided. And sec­ond, the data are also what's called a "12-month mov­ing av­er­age" that also in­cludes the 11 pre­vi­ous months. This makes in­ter­pret­ing any one month's re­sults harder.What should the Fed do? There are other signs of flag­ging eco­nomic growth: weak in­ter­na­tional trade and com­mod­ity prices; China's re­cent cur­rency de­val­u­a­tion. Still, if a broader con­sumer slow­down ma­te­ri­al­ized, it would over­shadow these and threaten the Fed's "liftoff." The Fed needs to be on the watch for fur­ther har­bin­gers of a slow­down.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.