As the economic data surfaced in June, rounding out second-quarter information, it became apparent t...
As the economic data surfaced in June, rounding out second-quarter information, it became apparent the rapid growth experienced in the first quarter was not going to be repeated.
But economy watchers will note that some analysts are predicting 3% growth for the second quarter. If true, first-half US growth will have made an impressive mark, especially as the financial markets attempt to get past the current period of wavering confidence in corporate America.
During June, the Fed left short-term interest rates unchanged, maintaining the federal funds target rate at 1.75%, the lowest level in more than 40 years.
Citing a fall in final demand and inventory growth, the Fed decided the combination of high productivity and low inflation would allow it to maintain the historically low rates.
Retail sales declined 0.9% in May, according to the commerce department. Excluding autos, retail sales declined 0.4%, the lowest growth since September 2001. As auto incentives lightened, sales fell from 14 million to 12.6 million units. With the consumer representing two-thirds of the US economy, any pull back in spending would call into question the stability of the recovery.
There have been additional worries that the higher unemployment rate, which was reported by the labor department at 5.8% during May, could hurt incomes, leading to less retail spending. We will need more than one month of data before beginning to draw conclusions.
Housing remains a bright spot for the US economy and should continue to do well, supported by lower mortgage rates, which continued downward throughout the month, ending at 6.55%. Lower mortgage rates across the curve will help support the sector and the flight to quality will keep them down.
Inflation is continuing to contract, as evidenced by the fact most of the indices of inflation were down in June. Producer prices were also down, by 0.4% according to the bureau of labour statistics, primarily driven by decreases in energy and food prices. Consumer prices were flat as car and light truck prices fell.
A combined economic growth of more than 4% for the first half of the year would be a surprise for most market watchers in light of events during the second half of 2001. It is important for investors to realise this is not 1994. The same capacity bottlenecks that occurred then are not present now, reducing the likelihood of a repeat of the aggressive tightening the Fed gave the markets during that period.
In 1994, employment was peaking and capacity utilisation was high. Lately, however, we have seen an upward trend in unemployment, as well as decreases in capacity utilisation.
As investors, we are outraged whenever illegal activity and fraud by management impacts what we believed were sound investment decisions. But the recent parade of MCI/WorldCom executives and insiders in front of Congress sparked other thoughts as we assess the landscape over the next several months. Historically, this period of economic malaise will recall how a sharp decline in business investment spending pulled the rug out from under the US economy.
Lower mortgage rates likely.
Inflation continuing to contract.
High productivity continuing.
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