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September 2007
National Economic Growth Remains Moderate
The latest data reinforce the impression of an economy in which growth remains moderate and inflationary pressures are likely to continue to subside. A soft landing with a slow convergence to trend growth is probable, unless uncertainties among households and investors suddenly trigger a sharp consumption slowdown or the credit crunch spreads beyond the housing sector.
Second Quarter Growth Was Revised Up
Real GDP growth in the second quarter was revised to 4 percent—0.6 percentage point higher than in the advance release. Revisions mainly came from higher estimates of business investment and net exports. This brought the average growth rate in the first half of 2007 to 2.3 percent, compared with 2.6 percent in 2006 and 2.9 percent in 2005. A number of one-time factors provided a boost to growth in the second quarter, most notably an improvement in the trade balance and stronger federal government spending. Business fixed investment also contributed 1.1 percentage points to real GDP growth, far exceeding its historical average. However, growth in consumption, particularly durable and nondurable, is slowing down (Chart 1).
Housing Market Remains the Economy's Weakest Link
To date, the housing market remains the biggest drag to the economy, and recent data suggest that it has yet to bottom out. Housing starts declined again in August, by 2.6 percent. Housing permits plunged another 5.9 percent, bringing the total for the year to 17 percent. Both the housing permits and starts were at the same levels a decade ago (Chart 2). Home sales tumbled in July and unsold inventories accumulated rapidly, pointing to further sales deterioration in the near future.
August's Employment Dip Was Alarming
Nonfarm payroll employment declined by 4,000 jobs in August, and July and June payroll employment growth was revised down to 68,000 and 69,000, respectively, for a total downward revision of 81,000 jobs (Chart 3). This came in as a big surprise, as we have not seen a single-month payroll decline since the "jobless recovery" of 2002–03. The unemployment rate stayed at 4.6 percent, as both household employment and the labor force declined. Labor force participation rate fell to 65.8 percent, the lowest since 2005.
Credit Conditions Tighten
In the wake of the recent financial market turmoil, investor uncertainty has increased significantly. Borrowing costs have risen, in particular for the short maturities and lower-graded securities, yet lenders are still willing to finance investment-graded securities. Macroeconomic implications of the credit tightening are still quite limited so far, although potentially could be more severe over the coming quarters if the mortgage credit crunch goes further deeper and spreads to other sectors.
However, Consumer Are Still Spending
Consumers continue to spend. Real personal consumption expenditures rose 0.3 percent in July, and retail sales rose 0.3 percent in August. Consumer confidence retreated in August but stayed flat in September, suggesting that consumers might have adapted a prudent attitude following the recent financial turmoil.
Consumer Inflation Continues to Decelerate
Inflationary pressures continue to ease. The core Consumer Price Index rose by 0.1 percent in August, and the overall CPI edged down by 0.1 percent, as the energy component of the index fell 3.2 percent. Recent months have seen a gradual deceleration in the growth of other core consumer price indexes as well. Core Personal Consumption Expenditures edged up 0.1 percent in July, having risen 1.9 percent over the past 12 months. The Dallas Fed's trimmed mean PCE price index rose 0.1 percent in July—up 2.2 percent from a year ago (Chart 4).
—Tao Wu
About
the Author
Wu is a senior economist in the Research Department at the Federal Reserve Bank of Dallas. |
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