I am personally in the "double dip" recession camp...if we have more economic contraction, more layoffs, we will see at the very least a static home resale market....my contention about the strength of the market is that it has been mostly driven by low interest rates, a type of immediacy that comes from "get in before the next rate increase" or worse..."get in before I lose my job"....so once the spate of home buying declines as we seem to be seeing now...there is the potential of the housing market becoming again a "buyers market" as sellers will outnumber buyers...simple supply and demand, which of course can be exacerbated by inflated prices paid in the first place.
story.news.yahoo.com
What the Fed Has to Consider This Week
Mon May 6,11:26 AM ET
By Victoria Thieberger
NEW YORK (Reuters) - The U.S. Federal Reserve (news - web sites) is sure to keep official interest rates at four-decade lows this week after a stream of soft data cast doubt on the strength of the economic recovery, analysts believe.
The central bank will wait for definite signs that the recovery in the world's largest economy is secure before it starts lifting the 1.75 percent federal funds rate back toward more neutral levels, probably in the second half of this year.
At Tuesday's meeting of the Fed's policy-setting arm, the Federal Open Market Committee (news - web sites), Fed officials will most likely stick to their view that the risks to the economy are balanced between future weakness and inflationary pressures.
Even though official rates are on the rise in other parts of the world, including Canada, Sweden and New Zealand, the Fed can afford to be patient.
Inflation remains tame, unemployment is at a 7-1/2-year high and there are scant signs of a much-awaited recovery in business investment.
Analysts reckon a mild recovery is underway and the data do not presage a decline back into negative territory. One risk on the horizon would be a lasting surge in energy prices.
So, what will the Fed focus on at its meeting on Tuesday?
DATA SENDING MIXED SIGNALS
After a burst of robust economic news earlier in the year, the data suggest the pace of growth has slowed dramatically in recent weeks.
Federal Reserve Chairman Alan Greenspan (news - web sites) told Congress last month that a solid expansion was not yet clearly in view, and mediocre economic numbers since then have backed him up. Other Fed officials have said that patchy numbers are to be expected when the economy is in a period of transition.
* Non-farm payrolls for April were disappointing, showing only the first rise in new jobs this year after previous gains were revised away. The unemployment rate jumped to 6.0 percent.
* The manufacturing sector continued to recover, expanding for the third straight month in April, according to the Institute of Supply Management. But the pace of growth has eased, especially in new orders.
* The Fed's anecdotal "Beige Book" report on the economy struck a guarded note, saying the overall tone of activity was positive but concerns remained about the speed of the fledgling expansion.
* Consumer confidence in April has edged back a little from recent highs, according to the Conference Board (news - web sites), but remains at strong levels as plans to buy big-ticket items held up,
Another survey by the University of Michigan showed a similar small retreat in sentiment, but not by enough to start raising jitters about consumer spending, which held up throughout the economic downturn. The risks ahead come from war in the Middle East, high levels of consumer debt and struggling stock prices.
* Retail sales were a touch softer than expected in March, rising just 0.2 percent although ex-autos, sales were up 0.4 percent. But there were surprisingly strong auto sales figures from the manufacturers last week.
Consumer spending, which makes up two-thirds of economic activity, needs to stay resilient to keep the recovery on track. Since consumers did not pull back on their purchases last year, unlike during prior economic downturns, economists believe spending will give less spur to the recovery since it does not have far to rebound.
* U.S. gross domestic product grew at a rapid 5.8 percent annual pace during the first quarter, helped by solid household demand, increased government defense spending and a slower pace of inventory liquidation by companies.
While no one expects that sort of growth to be sustained, Treasury Secretary Paul O'Neill has said he thinks the economy is back on the path to 3-percent to 3.5-percent growth.
* Productivity growth remained strong throughout the recession and early this year, an impressive result that bodes well for corporate profits and the economic outlook.
NOT ALL CLEAR SAILING
* Orders for costly durable goods fell by an unexpectedly large 0.5 percent in March, raising questions about Fed Chairman Alan Greenspan's comment in April that business investment has started to turn around.
* Capital spending in new equipment is seen as critical to sustaining the economy's momentum through the year, but so far, orders for machinery and demand for computers and electronic products have been anemic as corporate profitability has been severely pinched.
* But with signs that business confidence among chief executives is improving and profits are starting to firm, economists see the foundations for a pick-up in investment.
* The housing sector has slowed markedly after recent torrid gains. Housing starts and sales of existing homes slumped in March and total construction spending unexpectedly fell, suggesting a possible downward revision to preliminary first-quarter GDP (news - web sites) growth.
* Financial markets remain skeptical about the outlook for growth, with share prices and bond yields falling in recent weeks. The bond market has pushed back its expectations for Fed tightening, while the dollar remains vulnerable to further soft economic news after an aggressive sell-off over the past week.
But economists do not think the data is soft enough to suggest another dip back into negative territory.
* Inflation risks remain distant enough on the horizon that the Federal Reserve can take its time before moving interest rates back toward more neutral levels, from the current accommodative settings near 40-year lows.
Indeed, at its January meeting, the Fed actually discussed how to run policy if faced with potential deflation, that is, falling prices.
* Oil prices will need monitoring for their impact on consumers, though Fed officials, including Chairman Greenspan, have said the increases so far have not been enough to derail the nascent U.S. recovery. |
