Signs of faltering US economy surface

When the Fed convenes Tuesday, it could signal how it might respond to the slowdown.

By Ron Scherer | Staff writer of The Christian Science Monitor

from the August 6, 2007 edition

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New York - The economy is losing its umph as summer winds to a close.

For one, it's looking as if the downturn in housing is spreading to other parts of the economy. Investors, watching this happen, are becoming increasingly nervous and more selective with their loans.

The tightening of credit standards is taking place at a time when trends in consumer spending and the labor market are sending mixed signals.

These developments create a complex challenge for the Federal Reserve governors, whose role is to stimulate the economy in times of trouble. The Board of governors meets Tuesday to set interest rate policy. Already, the bond market has factored in an interest rate cut or two by December – if not by October.

Although the Fed is not expected to reduce rates tomorrow, it might send a signal that it will do so in the future if the central bank decides a slowing economy is a greater risk than inflation.

"Whenever the growth rate has slowed this much, the Fed has cut interest rates," says Paul Kasriel, chief economist at Northern Trust Co. in Chicago. "By the end of October, I think the GDP will have slowed to under 2 percent, and that will be the catalyst for the Fed to act." Gross Domestic Product (GDP) is the market value of all goods and services produced within the country.

One of the problems for the Fed is that some of the economic indicators are ambiguous. For example, last week the Labor Department reported that the economy had created 92,000 jobs in July. Wall Street had been expecting closer to 135,000 jobs. The actual unemployment rate ticked up to 4.6 percent from 4.5 percent.

However, government job creation dropped significantly – a factor that could be adjusted next month. "If you look at the private payroll numbers, they increased 120,000," says Drew Matus, an economist at Lehman Brothers in New York. "Overall, the message suggests the labor market in July was as healthy as it was in June."

But Mr. Kasriel sees signs the downturn in housing is now spreading.

He cites slow car and truck sales, a weakening recreational boat market, and slowing domestic sales of Harley-Davidson motorcycles. "It's spreading to freight haulers who are reporting weaker volumes. Caterpillar is reporting weaker domestic sales because of a slowdown in construction, and ad revenue is down for newspapers in part because of diminished real estate advertising," he says.

Consumers did not contribute much to the economy in the late spring and early summer. But again, the information is somewhat ambiguous. The International Council of Shopping Centers estimates July sales probably increased about 3 percent, helped by summer clearance sales, back-to-school shopping, and price promotions.

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