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Cautious optimism for US economy in 2007
The US economy is ending the year with a flurry of good news, including signs that inflation has receded, consumers are spending money briskly and growth is likely to continue well into 2007.
- Los Angeles Times-Washington Post News Service
- Published: 00:00 December 18, 2006
The US economy is ending the year with a flurry of good news, including signs that inflation has receded, consumers are spending money briskly and growth is likely to continue well into 2007.
Nearly gone is the inflation scare of the spring and summer, as are investors' doubts about whether a new Federal Reserve chairman would be tough enough to beat back price increases. And almost gone are analysts' worries that the slumping housing market would curb consumer spending and trigger a recession.
On the contrary, Wall Street celebrated all week as each unexpectedly rosy new economic figure rolled in.
Inflation, for the moment, is at 0 per cent: The consumer price index was unchanged in November as falling fuel prices and discounts on clothing, electronics, airfares, hotel rooms and other things offset increased prices for many other goods and services, the Labour Department said on Friday.
Factory production picked up last month. And over the past week other reports have shown robust retail sales, a buoyant labour market and a rebound in mortgage applications.
Landing
Stock and bond prices rallied, pushing the Dow Jones industrial average to two records last week, as many analysts and investors concluded that the economy is headed for a "soft landing," in which it would slow just enough to cool inflation without sliding into a recession.
"The inflation scare of 2006 is over," said Global Insight economist Kenneth Beauchemin, referring to the surge in prices earlier this year for fuel, apartment rents, airfares, hotel rooms, health care, education and a variety of services.
Those increases unsettled financial markets at a time when many investors were unsure about Fed Chairman Ben Bernanke, who had just started the job in February, succeeding Alan Greenspan.
The Fed raised its benchmark interest rate at three consecutive meetings from March to June, with Bernanke vowing to force inflation lower. By last month, both the CPI and the "core CPI," which excludes food and fuel prices, were unchanged, and the 12-month rates of change in each had declined from their earlier peaks.
More cautious analysts warning that gasoline prices have risen this month, which means that inflation may rise too.
Like Fed policymakers, they worry that there are still inflation pressures in an economy with very low unemployment, rising wages, slowing productivity and factories busier than average.
And some analysts continue to forecast a deeper economic slowdown next year as the housing market stays in the dumps, pushing up unemployment and perhaps causing consumers to curtail spending. They noted that the increase in factory output last month reflected a temporary rise in automobile production.
Manufacturing outside of the auto industry declined, particularly of products related to housing, such as furniture, appliances and home-building supplies. For now, though, Fed policymakers are convinced that the housing market's problems have not spilled over to the rest of the economy, in part because consumer spending has been supported by rising employment and wages.
With inflation flat last month, average weekly earnings rose 0.2 per cent and were 2.6 per cent higher than a year earlier.
When the Fed's top policymaking committee left interest rates unchanged this week, one member, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented, repeating a position he has taken for much of the year: He wants to raise rates to tame inflation more aggressively.
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