The U.S.
Economy Will Grow Slowly and Not Sink Into a Recession, The Conference
Board Reports Today
October 10, 2006…Varied economic indicators produced by
The Conference Board are now pointing to slow growth ahead in the U.S.,
but not a recession, according to an analysis released today by The
Conference Board, the global research and business membership
organization.
“The
challenge for both the Federal Reserve Board and the U.S. economy is that
this period of sub-par growth is likely to have little impact on inflation
and short-term interest rates,” says Gail D. Fosler, Executive Vice
President and Chief Economist of The Conference Board. Her
analysis appears in StraightTalk, a newsletter designed exclusively
for members of The Conference Board’s global business network. “Rather than coming down, they are likely to remain high for an extended
period or even go up.”
Over
the past three months, The Conference Board index of leading economic
indicators has turned down relative to its level six months ago for the
first time in this expansion.
“While
this signal is not particularly alarming, since the downturn is still
rather modest, it does suggest that the economic cycle is more mature than
is generally presumed,” says Fosler. “Although such downturns do
occur, they usually happen toward the end of the economic cycle.” The
current downturn is still in the range of the 1995 slowdown rather than
the sharper declines before the 1990 and 2001 recessions.
The rate of
change in the leading index is as important as its level. The LEI may dip
into negative territory, but the decline is likely to be modest or brief.
The key element is not only the level of the index, but the magnitude and
duration of its decline. According to both of these indicators, the LEI is
now signaling a downturn – not a recession.
THE
FED IS IN A PICKLE
The Federal Reserve Board is currently operating with little
leeway. The current topline Consumer Price Index is rising above a 4
percent annual rate, which is the highest inflation rate in over 15 years.
Core CPI is running at about 2.5 percent, which is on a par with the rate
that preceded the 2001 recession, and appears to be moving up to the 3
percent inflation rates of the mid-1990s.
“Despite the financial market’s enthusiasm for the Fed’s
restraint in August, it is hard to believe that the Fed will not have to
continue to raise the Fed funds rate in the face of these inflation
pressures,” says Fosler. “Before the Fed can actually cut rates, an
event or shock of a sufficient magnitude to reverse the currently
entrenched optimism in commodity markets will have to occur.”
The next several months
bear watching. Earlier, the Fed’s tightening had little or no impact and
it appeared that the U.S. economy might be reaccelerating after the shock
from Hurricane Katrina in the fourth quarter. The deceleration in the
economy is clearer now that consumer and investment spending and the
housing and employment sectors are beginning to weaken. Over the past two
years, the financial indicators in the LEI have taken the U.S. economy
toward lower ground and the nonfinancial indicators are now following
suit.
CAPITAL
GOODS MARKETS ARE WEAKENING
One of the
biggest disconnects in the U.S. economy has been between the rapid growth
in the capital goods and manufacturing sectors and the systemic weakness
of the consumer sector. The consumer goods sector, which was propped up by
low interest rates during 2000-2002, never faced the traditional recession
challenge. Outside of housing investment, the consumer sector never
recovered either. While consumer spending has remained in the 3-4 percent
range, the major benefactor has been consumer-related imports. Domestic
consumer goods orders on average have not grown at all over the past four
years.
The capital
goods sector has been the other overwhelming economic driver during this
cycle. The acceleration in nondefense capital goods orders during this
cycle dwarfs past investment booms – even those of the tech “bubble”
of the late 1990s. The year-to-year growth in capital goods orders peaked
at about 30 percent late last year. This growth is the result of what has
been, until very recently, rapid growth in domestic infrastructure,
housing, technology, and capital goods investment, as well as a boom in
investment in other parts of the world – especially emerging markets –
which is reflected in the rapid growth in export orders. Exports of
capital goods have been rising at a 13 percent annual rate over the past
year.
But
recently, the capital goods sector appears to be slowing. Besides the
slowdown in capital investment in the second quarter Gross Domestic
Product, there has been a sharp drop in capital goods orders overall.
Despite a
bounce back in August from July’s dip, the slowdown over the last
several months in the Institute of Supply Management export orders index,
which is generally a good leading indicator of export orders, is a matter
of even greater concern. The decline in the short-term trend of this index
suggests that external global demand for capital goods may be slowing.
Vendor performance, as measured by the percentage of companies reporting
slower deliveries, is still relatively high (above 50 percent).
WHERE
WILL PROFITS GO?
Corporate profitability, which is an important long-lead indicator
of the business cycle, is making stunning gains. When corporate profits
are high, investment usually grows rapidly and businesses spend more
freely on travel, marketing, and other general administrative expenses.
Hiring rises and, equally important, so does liquidity.
“What
is clear is that companies have been spending their cash flow freely
through investments and stock buybacks and increased dividends,” adds
Fosler. “Companies still appear relatively liquid, but the financing gap
is now in territory that bears vigilance.”
# # #
Source: StraightTalk, The Conference Board
ABOUT THE CONFERENCE BOARD
Not-for-profit and non-partisan, The Conference Board is one of the world’s leading research and business membership organizations. It produces the widely-watched Consumer Confidence Index, Help-Wanted Advertising Index, and Leading Economic Indicators for the U.S. and eight other major nations. The Conference Board is also noted for its economic forecasts and CEO surveys, and for its studies on global productivity, corporate governance, business ethics, corporate citizenship, workplace diversity and mature workers. Its conference and council programs attract more than 18,000 senior executives each year. www.conference-board.org.
