Joshua Shapiro
Joshua Shapiro
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The Fed tipped its hat to the fact that growth has slowed a bit, and blamed it on energy prices,
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A softening trend for consumer spending is the most likely outcome for most of this year, particularly as housing cools off. However, we do not think that consumer spending growth is going to fall apart anytime soon.
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The Fed comments were fairly unsurprising. They indicated that there is more tightening ahead, and that the pace will be determined by upcoming data.
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The information in the report is considered dated because the current focus is on the extent of the damage to the nation's energy and trade infrastructure and therefore on the lasting nature of the effect Hurricane Katrina.
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I don't think we're talking about a recession or a near recession. I think we're talking about growth that is slower than people expected.
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Combined with the fact that today's retail sales data point to a surge in July personal consumption, this means that the consumer entered Q3 with substantial momentum.
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People were expecting the worst and I think the reaction you saw is that it wasn't as Draconian as many had feared. There wasn't any real hard table pounding or anything in the minutes that pointed to a 50-basic point hike at the next meeting.
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I think they are trying to say that they can still do their tightening 25 basis points at a time, but they still have a long way to go in raising rates. Essentially, the message is, 'if you think we're nearly done, think again'.
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Housing has peaked and we're expecting some moderate weakening in 2006.
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The strength in manufacturing is increasingly tied to strong demand for exports as well as reasonably good domestic demand. Other economies are doing well and we've still got reasonably good economic growth and inventory rebuilding in the U.S.
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While we have seen an increase today versus a forecasted decline, housing starts are currently doing on a trend basis what many have forecasted: remaining on a high plateau, unable to move higher but not seeing demand fall off enough to take starts lower.
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There are reasonably deep-seated reasons for pessimism on the part of home builders.
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While these orders have been volatile of late, the trend remains a solid one. Whether we will see a disruption in this trend due to the surge in energy prices remains to be seen and will ultimately be more important to markets than today's pre-Katrina outcome.
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With mortgage rates still low, there is no evidence yet that levels of housing activity are declining to any great extent.