The turmoil in the sub-prime mortgage markets have lead to a great deal of concern about the state of the economy in recent weeks. Clearly, the full impact of the housing downturn has yet to play out fully. Many have called for the Federal Reserve to lower the Federal Funds rate to boost economic growth in the short term. In a statement on August 17, in tandem with a lowering of the discount rate, an FOMC statement said in part, “Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably.”
Whether or not the Fed will take any action before its next meeting scheduled for September 18th is a tough call. One factor that may stall any more on the Federal Funds rate until then is that other sources of growth appear to be continuing to offset the ongoing housing downturn.
Two days ago, the Commerce Department reported that durable goods orders rose a sharp 5.9 percent in July! This marks the fifth rise in the past six months and the biggest single increase in 10 months.
Ordinarily, such a large monthly rise is driven by volatile aircraft orders, and, in fact, nondefense aircraft and parts orders rose by 12.6 percent last month. But, even taking out transportation, new orders were up 3.7 percent in July, the biggest monthly gain in 23 months!
New orders for primary and fabricated metals, machinery, computers and electronics, as well as motor vehicles all posted increased orders last months. This is a good indication that business investment and exports continue to gain momentum as the economy makes its way through the third quarter.
To date, the economy has weathered the largest downturn in housing in 16 years pretty well. Though the construction sector as well as some manufacturing sectors that are closely linked to housing, such as wood products, nonmetallic minerals, furniture, and textile products have been hit very hard, the economy, and manufacturing, remain in an expansionary mode.
The Fed has stated that it will be following incoming data very closely as it weighs its next move. My guess is that the Fed is a little less likely to move today than it was last Thursday.
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