Financial Times Editorial Comment: US economic news shows neither gloom nor doom

Financial Times Editorial Comment: US economic news shows neither gloom nor doom
Copyright The Financial Times Limited 2007
Published: July 4 2007 21:29 | Last updated: July 4 2007 21:29



There are a few scratches on the surface; some long-established features are lacking; but the fundamentals are largely intact. No, not the iPhone. Another much hyped yet reliable standard bearer of global commerce: the US economy. Despite recent setbacks, inflation and output data show that the US appears to be doing fine – without much reason for undue concern, still less irrational exuberance.

Jitters in global credit markets may have captured the headlines of late, but other news suggests that the US economy remains resilient. Core inflation is slightly down at 1.9 per cent. That goes hand-in-hand with the Federal Reserve’s decision to leave rates at 5.25 per cent and to drop a reference to core inflation being “somewhat elevated”. Final output growth for the first quarter of 0.7 per cent is low but expectedly so, and second-quarter figures will likely see a large increase.

Neither piece of data is cause for celebration. While the Fed rightly claims that core inflation has “improved modestly” it is still worried that the expected “sustained moderation in inflation pressures” may not materialise. Unemployment is already low; further downward pressures could send inflation higher again.

Gross domestic product will likely bounce back in the second quarter after an unusual lull in the first. This is partly an illusion created by fickle data. First-quarter GDP data shows an inventory correction combined with a surprise decline in both government spending and net exports over the New Year period. Second-quarter data will likely reverse these unexpected jumps. Taking the average over six months would suggest an annualised growth rate of perhaps two per cent.

That rate is still below the US long-term growth potential, and housing is, again, the culprit. Weakness in that sector may have chopped off as much as one percentage point of annualised GDP growth in the first quarter.

More hopefully, corporate spending appears to be gaining strength and the labour market is remarkably robust. All that, of course, also creates inflationary pressures. Luckily, there is some evidence that consumption has moderated, which reduces risks of overheating later.

The US may still be thrown off course, either by continued bad news from housing or an overly sharp tightening of credit markets. Until then, the Fed is right to maintain its focus on inflation. The economy is bouncing along a relatively steady underlying growth path. It would be surprising to find a crash in the near future – or, sadly, a dramatic, sustained acceleration.