Economic Research and Data

Economic Trends

Filling you in on the current state of the economy

06.19.07
The Economy in Perspective

Same numbers, different stories…

Looks Like a Soft Landing

The latest data on the economy suggest that it handily weathered the first-quarter storm. Indeed, one could easily argue that the underlying pace of economic growth has been fairly solid for the past year and that observed weakness has resulted primarily from temporary problems in the housing sector.

It’s Still a Bumpy Ride

The latest data on the economy suggest that it still has a way to go before we can say that it has regained a firm footing. Indeed, one could easily argue that the first-quarter storm simply illustrated that the underlying pace of economic growth has been somewhat questionable for the past year, largely because of ongoing problems in the housing sector.
The same could be said of inflation concerns. Sure, the headline inflation numbers have been unacceptably high, but one needn’t go very far beneath the surface to see that the CPI reports on inflation excluding food and energy have been improving over the past few months. The same could be said of inflation concerns. Sure, the CPI reports on inflation excluding food and energy have been improving over the past few months, but one should not forget that the headline inflation numbers have been unacceptably high.
Let’s consider each of these elements of the economic outlook in turn, beginning with the real economy. Let’s consider each of these elements of the economic outlook in turn, beginning with the real economy.
Real GDP advanced at a 3.3 percent rate in 2006: Without the poor performance of the residential investment sector, which declined at a rate of 4.2 percent, it would have grown by 3.8 percent. Labor market conditions were also solid in 2006: The unemployment rate averaged 4.6 percent for the year as a whole and remained virtually unchanged for the last half of the year. These numbers indicate that the economy was fundamentally sound heading into 2007. Real GDP advanced at a 3.3 percent rate in 2006, but the growth picture was not balanced over the year. First-quarter growth swelled at an annual rate of 5.6 percent, then promptly settled back into the 2.0 percent–2.5 percent range for the rest of the year, largely because of poor performance in the residential investment sector. The unemployment rate averaged 4.6 percent for the year as a whole and remained virtually unchanged for the last half of the year. However, the rate of net employment change actually peaked at mid-year and has been slowing ever since. These numbers indicate that the economy had shifted onto a slower growth track heading into 2007.
What should we make of the paltry 0.6 percent growth rate reported for the first quarter? Not much, because GDP growth was held down by two factors, the ongoing correction in the housing markets and a significant inventory swing, each of which depressed GDP growth by nearly a full percentage point. Without these temporary disturbances, the economy would have expanded at a rate close to 2.5 percent—no barn burner but certainly respectable. What should we make of the paltry 0.6 percent growth rate reported for the first quarter? Confirmation of the slower growth track, perhaps. Once again, GDP growth was held down by two factors, the ongoing correction in the housing markets and a significant inventory swing, each of which depressed GDP growth by nearly a full percentage point. Yet even without these temporary disturbances, the economy would have expanded at a rate close to 2.5 percent—about the same as its underlying pace for over a year now.
And the good news is that the most recent capital spending reports have improved, along with business sentiment, which augurs well for a sector that has been a drag on growth despite the strength of corporate profits and balance sheets. Fortunately, capital spending appears to have improved recently, along with business sentiment. Nevertheless, capital spending still seems subpar, considering the strength of corporate profits and balance sheets.
Turning to inflation, the last several reports have been favorable. Yes, the headline CPI numbers still do not look very good (annualized percent changes of 8.4 for 1 month, 7.0 for 3 months, and 5.5 for 6 months). But the CPI excluding food and energy has been coming in at annualized rates of 2.1 percent for the last six months, 1.6 percent for the last three, and 1.8 percent for the last month. That should ease the concerns of inflation worriers. Turning to inflation, the last several reports have continued to be problematic. The headline CPI numbers still do not look very good (annualized percent changes of 8.4 for 1 month, 7.0 for 3 months, and 5.5 for 6 months). Yes, the CPI excluding food and energy has been coming in at annualized rates of 2.1 percent for the last six months, 1.6 percent for the last three, and 1.8 percent for the last month. But other core measures, ones that do not automatically disregard energy prices, still place the underlying inflation rate in the 2½–3 percent range. That should continue to trouble inflation worriers.

Economic Trends is published by the Research Department of the Federal Reserve Bank of Cleveland.

Views stated in Economic Trends are those of individuals in the Research Department and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. Materials may be reprinted provided that the source is credited.

If you'd like to subscribe to a free e-mail service that tells you when Trends is updated, please send an empty email message to econpubs-on@mail-list.com. No commands in either the subject header or message body are required.

ISSN 0748-2922



top