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US economy weathering credit crunch, so far

The first economic data to emerge since last month's credit woes suggest a modest impact on business and consumers.

By Staff writer of The Christian Science Monitor / September 7, 2007

The first economic data to emerge since a credit storm walloped Wall Street last month suggest that the immediate impact on business and consumer behavior was modest.

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Shoppers still filled up their carts at Target and JCPenney. Service-sector industries saw a rise in new orders. An index of manufacturing production ticked upward.

Although all this falls far short of providing an "all-clear" signal for the economy, it allows some breathing room as the world's central banks work to restore order in credit markets. The risk of recession remains very real, economists say, and they expect the Federal Reserve to act accordingly by cutting interest rates at a policy meeting Sept. 18.

"The economy looks pretty good…. It's the turmoil in the credit markets that poses a risk of taking a very good story for the economy and trashing it," says Ed Yardeni, an economist who heads Yardeni Research Inc. in Great Neck, N.Y. "It's not a widespread credit crunch yet, but it certainly has that potential."

The danger: that there will be a "contagion" effect from investor worries about the collapsing value of debt securities that are linked to tottering subprime loans. Already, in recent weeks, big investors have grown less willing to buy mortgage-backed securities or the short-term "commercial paper" debt issued by financial-service firms. Big banks, facing their own reappraisal of portfolios, have been less willing to provide short-term credit to one another.

But how much is all this affecting Main Street?

Central bankers and other economic players are closely watching indicators this week, which are the first to be released that encompass the month of August, when the credit pinch began in earnest.

So far, the indicators reveal an economy that is probably weakening, but not falling apart at the seams.

•An index of service sector-activity – most of the US economy – registered 55.8 in August, the same as in July, the Institute for Supply Management said Thursday. Any reading above 50 is considered a sign of expansion, and the August number was a bit higher than expected.

•A parallel index of manufacturing activity, released Monday, stood at 52.9 in August, down from 53.8 in July, and slightly below forecasts. Within the index, a gauge of factory output rose but new orders fell.

•Chain retail stores reported solid growth Thursday, with Wal-Mart among several whose August sales gains beat expectations.

•Automakers had a slower August than they did last year, but with the sales rate only 0.7 percent lower. For this year to date, car sales are 3 percent lower than for the same period in 2006.

•The Federal Reserve's "Beige Book," an anecdotal summary of economic conditions gathered by regional Fed banks, saw few signs of a credit crunch outside the housing sector. But while the economy is generally expanding, the pace seems to be growing more tepid in many regions.