A Slowdown in the Making

By April 18, 2006Economy

Business is UpIn 10 days, the Commerce Department will release its advanced report on the performance of the economy during the 1st quarter of the year. When the news comes out that the GDP grew at or near a 5 percent pace, some pundits may warn that the economy is overheating. But don’t believe it. More than anything, the strong growth that took place earlier in the year was more of a rebound from wake of anemic growth in the 4th quarter that was left by the 2005 hurricane season.

In fact, a slowdown is in the making. As reported in the AP today, housing starts were down in March for the 4th time in the past 6 months. This is a clear sign that the surge in the housing market is finally starting to cool down. And with increasing gasoline prices ( up 20% since the beginning of March and now approaching $3 a gallon) likely to reduce consumer spending, a deceleration in economic growth going forward is a sure bet.

Whether or not, the economy will continue to grow fast enough to maintain current employment levels will be left to business investment and export growth, which is where manufacturers come in, since they purchase roughly a fifth of all business investment and account for nearly two-thirds of all exports.

One key going forward will be future decisions by the Federal Reserve to raise interest rates. While one more increase in the federal funds rate to 5% is all by assured, the Fed should be wary to raise interest rates beyond that point. Amid skyrocketing health care and energy costs, a relatively low cost of capital is one thing our economy has going for it. Take that away, and the chances of a slowdown turning into a meltdown becomes a real possibility. Lets hope Chairman Bernanke and the rest of the FOMC make the right call over the coming months and give their interest rate campaign a summer break.