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'The Economy Is Often Not So Compliant'

12:00 AM, Apr 19, 2014 • By IRWIN M. STELZER
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A few weeks ago I suggested that we now know when Federal Reserve Board chair Janet Yellen will raise interest rates: never. Her first formal monetary policy speech can be read to support that view, or at least that “normal” interest rates are what the Economist describes as “a distant prospect.” It will take more than the recent spate of good news to stay Yellen from her course.

Janet Yellen

The Beige Book, a survey of the 12 Federal Reserve districts, was released on the same day as Yellen addressed the New York Economic Club. “Economic activity increased in most [ten] regions of the country ….Consumer spending increased in most Districts … the transportation sector generally strengthened… manufacturing improved… home prices rose modestly and inventory [the stock of unsold houses] remained low….loan demand strengthened … labor market conditions were mixed but generally positive.” Not too shabby as the ‘tweens like to say, in other connections, of course.

Retail sales in March recorded their best gain in a year and a half (+1.1 percent over the previous month), and estimates for January and February were revised upward. That prompted Goldman Sachs’ economists to raise their guess as to what the overall growth figures for the first quarter will show, and Bank of Tokyo-Mitsubishi chief financial economist Chris Rupkey to tell the press, “The linchpin of economic growth, the consumer, is back.” Some analysts doubt whether the pace of the last two months can be maintained, in which case the economy will continue to plod along at a 2 percent growth rate or less. But many mall operators report increased foot traffic, and Mike Jackson, CEO of AutoNation, America’s largest car retailer, says he expects vehicle sales this year to hit 16 million units, topping the 15.6 million cars and light trucks sold last year, which was “a boffo year” according to the industry press.    

Other signs are just about as good. Industrial production in March rose smartly, and the manufacturing sector more than regained the sharp, weather-related losses it experienced in January. The much-watched Thompson/Reuters/University of Michigan index of consumer sentiment is at its highest level since July of last year. Those who worry about the government’s deficit found relief from the non-partisan Congressional Budget Office (CBO), which lowered its prediction of the red ink the government will spill both this year and later in the decade.

Finally, more and more companies now say they will stop buying back shares, increasing dividends, and squirrelling away every last penny, and instead increase spending on plant and equipment. Such spending, which rose by a mere 1 percent in 2013, looks set to rise by 6 percent this year, according to data provided by FactSet. The rule of thumb has been that when the economy is producing at 80 percent of capacity, businesses have to expand to meet demand. It is now operating at 78.8 percent of capacity.

If the capital spending materializes, the Fed can take a bow. Low interest rates make it cheaper for companies to borrow to fund that spending, which is what they are doing. The six largest banks report that commercial loans outstanding increased 8.3 percent in the first quarter compared with the same period last year. The increase was helped by the better financial condition of potential borrowers, making lending to them less risky, and regulatory crack-downs that have made many less traditional areas of the banking business less attractive than plain vanilla lending.

Throw in an increase by the World Trade Organization (WTO) in its forecast of the volume of world trade, and an upward revision of International Monetary Fund forecasts of global and U.S. growth, and the only problematic bit of data relates to the housing market. The seasonal selling season is off to a slow start, but whether that is because higher house prices and interest rates are stifling demand or because inventories of unsold homes are very low cannot yet be determined. If it’s high prices and rates, sales might disappoint; if it’s low inventories, expect construction activity to pick up.

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