Deller's two cents: Have you ever been in a very "close miss" car accident where your adrenaline spikes and you stop and sit for a minute to catch your breath? After a few minutes you restart your travels. Well, the economy is going through the same thing. We came real close to going over the edge and into a true depression. But, we pulled back and a lot of industries, particularly the financial (e.g., banks) sector, are still catching their breath. What we are waiting for is for the economy to have caught its breath and ready to return moving forward.
Economic Week in Review: Stubborn recovery follows recession's end September 24, 2010
Good economic news arrived this week, but the nation remained on guard. Although it was announced on Monday that the Great Recession had officially ended more than a year ago, economic growth has been so sluggish that unemployment levels retained a recessionary feel. The Federal Reserve said it would maintain its current monetary policies as the economy continued to struggle. Problems still plagued the housing market, but existing-home sales and new construction both rose in August and new-home sales stayed about the same. The Conference Board's index of leading indicators was up, and the durable-goods report also brought welcome data. For the week, the S&P 500 Index rose 2.1% to 1,148 (for a year-to-date total return-including price change plus dividends-of about 4.5%). The yield of the 10-year U.S. Treasury note fell 13 basis points to 2.62% (for a year-to-date decrease of 123 basis points).
Recession's been over for 15 months
The historic 18-month recession of 2007-2009 officially ended in June 2009, the National Bureau of Economic Research's Business Cycle Dating Committee announced on Monday. Although the deep and long recession ground to a halt more than a year ago, the economy's recovery has been very slow. High unemployment remains a threat, but recent strong corporate earnings and encouraging manufacturing and housing data offer reasons for optimism.
Fed maintains policy
The Federal Open Market Committee (FOMC) voted to keep the federal funds rate between 0% and 0.25% "for an extended period." While the Fed has kept the rate at that record-low level since December 2008, its recent statement indicated that it would welcome a more robust increase in general consumer prices. With inflation and economic growth so low and unemployment high, the Fed said it was necessary to maintain its current policy in order for the economy to expand. However, one committee member dissented from this aggressive stance. The Fed also said it would "maintain its existing policy of reinvesting principal payments from its securities holdings."
As Vanguard economist Roger Aliaga-Díaz noted, "The Fed is hinting it remains well open to considering a second quantitative easing via purchases of Treasuries, mainly as a way to fight deflationary trends."
Partial good news for durable goods
Orders for durable goods declined 1.3% in August, the largest drop in a year. Beyond the report's surface, however, the news was much better. Excluding transportation, new orders climbed 2.0%. Core capital goods orders, which exclude defense and aircraft, rose 4.1%, and July's decline was adjusted to 5.3% from 8.0%. Compared to a year ago, capital goods were up 18%. Although shipments fell 1.5%, core capital shipments increased 1.6%. The report indicated that U.S. manufacturing is stirring.
Index of leading indicators moves ahead
The Conference Board's index of leading indicators rose 0.3% in August, slightly more than expected and an indication the economy would continue slowly growing into 2011. Still, the Conference Board said the U.S. "could slide back into recession." Seven of the index's ten components were positive: interest rate spread, real money supply, average weekly manufacturing hours, building permits, stock prices, consumer expectations, and new orders for nondefense capital goods. Negative indicators were average weekly initial claims for unemployment, vendor performance, and manufacturers' new orders for consumer goods and materials. The Conference Board's coincident indicator, which measures current economic activity, was unchanged in August.
Housing starts make gains
New residential construction rose for the second straight month in August, above economists' expectations. Although the number of new units increased 11% from July to an annualized 598,000, the market remained weak. Starts of multifamily units advanced 32.2%, but new construction of single-family homes, which represent a much larger part of the market, climbed just 4.3%. Single-family home starts rose for the first time in four months, but the pace was still 9.1% lower than last year's. Large gains in the West and Midwest and a smaller gain in the South offset a major decline in the Northeast. Permits for new construction rose 1.8% and housing completions gained 5.6%, although both were down compared with a year ago.
Existing-home sales rise; new-home sales steady
Sales of existing homes increased 7.6% in August to an annual rate of 4.13 million, in line with expectations. Although the results were welcome after July's 27.2% plunge related to the expiration of the federal tax credit for homebuyers, they remained very low by historical levels. New-home sales were unchanged in August at an annualized rate of 288,000, slightly worse than expected. At that rate, there was an 8.6-month supply of new homes on the market.
The economic week ahead
Next Friday is shaping up as an especially busy day on the economic calendar, with reports due on personal income, construction spending, and manufacturing. Releases are also scheduled for consumer confidence on Tuesday and gross domestic product (GDP) on Thursday.
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Steven C. Deller
Professor and Community Development Economist Department of Agricultural and Applied Economics
515 Taylor Hall --- 427 Lorch Street
University of Wisconsin-Madison/Extension Madison, WI 53706
608-263-6251
"I started out with nothing and I have most of it left."
Seasick Steve
