eXTReMe Tracker

 

US economy to cruise through 07

The US economy will easily skirt recession this year as consumer spending remains sufficiently sturdy to offset the effects of a housing downturn, according to a Reuters poll. This resilience may even allow the Federal Reserve to leave interest rates unchanged this year – a 40 per cent chance, according to respondents – although a majority still expect them to come down by the end of June.

The poll of 58 economists showed they expected growth to coast along at a rate of about 2.5 per cent in 2007, picking up to 3.0 per cent next year. That is little changed from 2.6 per cent for this year in a poll taken one month ago. Fears that the housing slump would drag middle-America into the gutter appear to have faded, with signs of incipient stability in the sector bolstering sentiment about US economic prospects as a whole.

Manufacturing, another sore spot in the outlook, seems to be faring just well enough not to threaten the benign growth picture. Rising incomes, which took some time to catch up to productivity increases, should offer some help. "As the economy continues to exhibit strength against the backdrop of slowly fading adjustments in housing and manufacturing, market expectations of significantly weaker growth are ebbing," said Robert Mellman, economist at JP Morgan.

As for interest rates, most still see the Federal Reserve pushing them lower them before the year is over. The first rate cut will likely come in the second quarter, the survey indicates, followed by another in the fourth. That would bring the federal funds rate to 4.75 per cent from its current 5.25 per cent, but hinges on a continued gradual moderation in the rate of inflation.

Economists forecast core CPI to average 2.3 per cent this year compared with 2.4 per cent projected in last month's poll. The very gradual nature of such a drop in interest rates indicates many of those polled have become less convinced of the certainty of looser monetary policy this year as pockets of resilience have emerged in the economic data.

Futures markets have already acknowledged the shift, and are now pricing in just one rate cut for 2007 as a whole – down from more than three late last year. "The Fed's rate-setting behaviour contains a significant amount of inertia: a Fed at rest tends to stay at rest," said John Shin, economist at Lehman Brothers.

Those with bearish views on the economy warn, however, that weather may have been a big part of a late-year surge in activity, which could have been more of a last hurrah for consumer spending than a sign of renewed vigour. Last year was the warmest on record in the United States. The spring-like temperatures surrounding the Christmas season may have not only artificially boosted holiday shopping but also given false hope that the housing market was stabilising.

Lower energy prices, a key boost to consumption, may also not be around forever. Despite a drastic recent slide, cooler temperatures were pushing the cost of an oil barrel back up toward $53 ($NZ77). To be sure, the labour market seems to be holding fairly well at this stage in the business cycle. With around 160,000 jobs being created per month over the past six months and the unemployment rate at just 4.5 per cent, this key marker of economic performance gives reason for cautious optimism.

Cautious, because the Reuters survey indicates conditions will worsen in coming months – the unemployment rate is expected to average 4.8 per cent for the year.