Vital Signs: Healthy Economy, with Soft Spots
The Federal Reserve decided to hold interest rates steady at its Sept. 20 monetary policy meeting. Economic reports coming out over the next week are likely to back up the Fed's view of the economy and provide more ammunition to keep rates on hold.
In its post meeting press release, the central bank first observed that economic growth is moderating thanks in part to "a cooling of the housing market." Housing starts plunged 6% in August, and economists see further erosion in new and existing home sales for August. Home price and inventory figures also bear watching. If home builders are to eliminate excess inventories, prices may need to be reduced or incentives ratcheted up. And any price cuts on new homes could have some impact on the existing home market.
The Fed's preferred gauge of inflation, the personal consumption expenditures price index, is likely to show that yearly inflation in August remained above the Fed comfort level of 1% to 2%. Chairman Ben Bernanke and his colleagues noted in their post-meeting press release that prices outside of food and energy "have been elevated."
But the core PCE measure should soon begin to show the positive effects of lower energy prices. Drops in gasoline, oil, and natural gas prices are one reason the Fed expects inflation to moderate despite other factors, such as higher unit labor costs, which could apply upward pressure on prices in coming months.
Lower energy prices are a plus for consumers and businesses. The declines have lifted consumer spirits as well as returned some purchasing power back to Americans. August consumption figures for August probably held up well. Meanwhile, durable goods figures will likely show that businesses are still plowing ahead with capital investment plans.
All in all, the week's data should confirm that there are some soft spots in the economy, but overall conditions still look fairly healthy. What's more, lower energy prices will likely be viewed as a positive for both growth and inflation in the eyes of the Fed.
Here's the economic calendar for the week of Sept. 25, from Action Economics.