Justa, Housing still strong today...but...Any feelings on the "C" - word ......confidence?:
Fed's Broaddus Calls Drop in Consumer Confidence `Discouraging'
By Will Edwards and Brendan Murray
Newport News, Virginia, April 24 (Bloomberg) -- A decline in consumer
confidence this month was ``a discouraging development'' and may be a sign the
economy won't rebound as rapidly as previously thought, said Alfred Broaddus,
president of the Federal Reserve Bank of Richmond.
``The key to the near-term outlook is confidence, both business and consumer
confidence,'' he told students and faculty at Christopher Newport University in
Newport News, Virginia.
``If factory workers come to believe that they are going to be laid off for an
extended period of time,'' consumers may cut back on spending, said Broaddus,
a non-voting member of the Fed's policy-setting Open Market Committee. ``If
consumer spending holds up, and admittedly that's a big if,'' and the slowdown is
isolated to manufacturing, ``we could get through this sooner rather than later,''
he said.
Conditions in the economy are ``unusually uneven,'' Broaddus said, citing
weakness in business investment and manufacturing generally -- with the
exception of autos. At the same time, residential and commercial construction
``are holding up reasonably well'' and the unemployment rate ``is still very near
the lowest in a generation,'' he said.
``The principle question that we face is whether the weakness will spread.''
His comments suggested Broaddus is less optimistic than he was in late March,
when he said the economy was more likely to pick up than to weaken further. He
echoed the Fed's statement after it reduced interest rates last week that the
central bank stood ready to do so again, if necessary.
Cutting Rates `Aggressively'
The Fed has acted ``quite aggressively'' in making four interest-rate reductions
so far this year, including a surprise half-point cut in the target interest rate on
overnight loans between banks last Wednesday, Broaddus said.
``Inflation still is very low by longer-term historical standards and it's expected to
stay low.'' Because of that, ``the credibility of the Fed is intact'' as an inflation
fighter. ``That gives the Fed greater latitude to deal with any additional economic
weakness.''
The economy expanded at a 1 percent annual rate in the final three months of
last year, the slowest in 5 1/2 years. Analysts forecast that gross domestic
product grew at about the same pace in the first quarter of this year. The
government will report Friday on first-quarter GDP.
Confidence Decline
Broaddus noted that the Conference Board's index of consumer confidence fell
this month to 109.2, the sixth decline in seven months, from 116.9 in March. The
April reading was the same as February's, which was the lowest since October
1996.
After the March increase in confidence, the April drop ``was a bit of a
discouraging development,'' he said.
The Fed's rate reduction last week was the fourth this year and the second
surprise cut that occurred between regular meetings of the FOMC. Last week's
action reduced the overnight rate to 4.5 percent, the lowest in more than six
years and down 2 percentage points from the first of the year. It helped boost
stock prices further in April. The Nasdaq Composite Index has jumped 10
percent in April, while the Standard & Poor's 500 Index has climbed almost 4
percent.
As he did in a pair of speeches last month, Broaddus painted two pictures of the
outlook for growth -- one calling for a rebound and one looking at further
weakness. He said neither scenario is his personal forecast and he prefers to
rely on the consensus of professional forecasters. ``The trouble is, today there
isn't much of a consensus.''
The weakness in the economy has mostly been in manufacturing, Broaddus
said. That led to an excess buildup of inventories and caused businesses to
reduce production until those stockpiles could be reduced to match demand.
Manufacturers also have found themselves with more capacity to produce goods
than there is demand. The excess may restrain companies from new investment
and poses a particular problem ``for those manufacturers primarily producing
equipment for other businesses,'' he said. ``That's a big downside risk in the
economy.''
On the bright side, automakers and some other manufacturers have already
succeeded in bringing their stockpiles of unsold goods in line with sales, he
said.
``The good news is that this inventory adjustment process appears to be
proceeding rapidly,'' Broaddus said. ``It may be progressing more rapidly than in
some prior business cycles'' because of better inventory management, he said. |
