April 2006

Economic Growth Bounces Back

The economy appears to have rebounded in the first quarter, after a weak fourth quarter. Employment has expanded, the manufacturing sector has continued to grow, although at an uneven pace, and consumers have continued to spend. There are, however, increased signs of cooling in the housing market. Leading measures of core inflation remain around 2 percent.

Economic Growth Appears to Have Rebounded in First Quarter
The economy hit a soft patch in the fourth quarter. GDP grew at a 1.7 percent annual rate, according to the March 30 report by the Bureau of Economic Analysis.

Although first-quarter data will not be available until April 28, most forecasters believe that GDP growth exceeded 4 percent (annual rate) in the quarter, as the economy rebounded from the previous quarter’s weakness.

Nonfarm payrolls added 243,000 jobs in February, the fourth consecutive month of solid job growth (Chart 1). The gains were broad-based, with 45,000 jobs added in the goods sector and 198,000 added in the services sector. The unemployment rate, computed from the household employment survey, was 4.8 percent in February, up slightly from 4.7 percent in January but down from 5.4 percent in February 2005.

Initial jobless claims have been averaging a little more than 300,000 per week, a level that is consistent with continued job growth. Although claims are slightly higher than in January, they are below their pre-Katrina level (and well below their post-Katrina spike).

Manufacturing output has generally continued to grow, although at an uneven pace (Chart 2). While output grew less than 0.1 percent in February, the weak showing followed strong 0.8 percent growth in January, probably aided by the latter month’s unseasonably warm weather. February output was up 4.2 percent from a year earlier. Even as monthly output growth has fluctuated, the Institute for Supply Management (ISM) manufacturing index has consistently remained above 50, signaling an underlying pattern of growth.

Real consumer spending rose 0.1 percent in February; excluding volatile auto purchases, real spending rose 0.2 percent. February was the fifth consecutive month with real growth of 0.2 percent or better in real non-auto spending. Consumer confidence improved in March, according to both the University of Michigan and Conference Board surveys.

Housing Market Appears to Be Cooling
February data on residential construction activity provided further evidence that the housing market is cooling. Single-family permits fell 2 percent and were down 6 percent from their September 2005 peak. Housing starts fell 8 percent.

Home sales data confirm this pattern (Chart 3). New home sales plunged more than 10 percent in February and were down 21 percent from their July 2005 peak. Although existing home sales rose 5 percent in February, they were down 5 percent from their June 2005 peak.

Core Inflation Remains Around 2 Percent
Chart 4 presents 12-month changes in three measures of core, or trend, inflation. One is the Consumer Price Index (CPI), excluding the volatile food and energy components. Another is the personal consumption expenditures (PCE) price index, excluding food and energy. The third is the U.S. Trimmed-Mean PCE Inflation Rate index, developed by Jim Dolmas of the Federal Reserve Bank of Dallas, which removes extreme (upward or downward) price changes from each month’s index, regardless of which goods or services are involved.

These core inflation measures have generally remained around 2 percent:

• The ex-food-and-energy CPI rose at a 1.8 percent annual rate in February, after rising at a 2.4 percent rate in January and a 1.8 percent rate in December. As of February, it had risen at a 2.3 percent annual rate over the preceding six months and was up 2.1 percent from a year earlier.
• The ex-food-and-energy PCE price index rose at a 1.5 percent annual rate in February, after rising at a 2 percent rate in January and a 1.6 percent rate in December. As of February, it had risen at a 2.1 percent annual rate over the preceding six months and was up 1.8 percent from a year earlier.
• The U.S. Trimmed-Mean PCE Inflation Rate index rose at a 1.8 percent annual rate in February, after rising at a 3.1 percent rate in January and a 1.5 percent rate in December. As of February, it had risen at a 2.3 percent annual rate over the preceding six months and was up 2.2 percent from a year earlier.

—Alan D. Viard