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Economic Growth 'Roaring Back' in 2006 Moneynews
(Headlines - scroll down for full stories)
It's almost March 1, marking the imminent end of winter and the beginning of spring. And to coincide with this seasonal rejuvenation, the major media is beginning to unleash its "revival" metaphors to describe the U.S. economy. But this time, they actually fit. Associated Press economics writer Jeannine Aversa proclaims: "The economy ended 2005 like a lamb and is roaring back like a lion, a resounding rebound that economists say will lead the Federal Reserve to raise interest rates in the months ahead."
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Aversa cites numbers from the National Association for Business Economics, which reports that from January through March, gross domestic product has risen at a 4.4% clip. That's up from an earlier NABE estimate of 3.4% for the same period. The 4.5% number also represents the best quarterly showing since July through September of 2003, when the economy grew by a whopping 7.2%. The NABE numbers come out roughly one month in advance of the U.S. government's own GDP numbers. In the last quarter of 2005, American GDP growth clocked in at a tepid 1.1%, due primarily to difficulties in dealing with the Gulf Coast hurricane season, higher oil prices and a reduction in consumer spending. "Our forecasters expect the economy to shake off the effects of last year's hurricanes and surging oil prices," said NABE President Stuart Hoffman, who is also chief economist at PNC Financial Services Group. Hoffman also agreed with economic observers who say that Federal Reserve Chairman Ben Bernanke will likely raise interest rates at the next Fed meeting on March 27. But Aversa reports that while interest rates are currently at long-time highs, they won't stay that way for long. "A key interest rate controlled by the Fed now stands at 4.5%, the highest in nearly five years," she writes. "Economists, including some who had been uncertain about the future direction of rates, now say this rate will climb to at least 5% this year. After that, analysts say, the Fed probably will take a break and leave rates alone for a while. In 2007, the forecasters predict the Fed gradually will start lowering this rate." Looking past the first quarter of the year, economists surveyed by the Associated Press anticipate that the U.S. economy will grow by roughly 3.3%, a tick or two below the 3.5% spike in GDP growth for all of 2005. They also say that in 2007, GDP should grow by 3.1%, weighed down by tightened consumer spending and a pale U.S. housing economic market. Some other predictions for 2006 by the NABE, as reported by the Associated Press:
The AP says that economists see inflation abating in 2006, with consumer prices "expected to increase by 2.9% this year and 2.4% next year. That would be an improvement from last year's 3.4% jump, the biggest in five years."
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2. Bernanke: Fed Won't Manipulate Housing Federal Reserve Chairman Ben Bernanke is making it clear that under his watch, the Fed won't adjust interest rates to try and influence the U.S. housing market. "It's generally a bad idea for the Fed to be the arbiter of asset prices," Bernanke, 52, noted during the question-and-answer portion of a speech at Princeton University in New Jersey last week. "The Fed doesn't really have any better information than other people in the market about what the correct value of asset prices is." Bloomberg News covered the speech, noting that Bernanke's hands-off stance is similar to that of his predecessor Alan Greenspan. Critics have long maintained that Greenspan missed an opportunity to keep both the Dot-Com bubble and rising home prices at bay in recent years. But Bernanke isn't buying it. "The Fed doesn't really have good instruments for addressing asset price bubbles should they exist, particularly if they are in one particular segment or another," Bernanke added. "I don't think the Fed ought to intentionally try to manage asset-price movements." Still, Bernanke did candidly admit that he would "pay close attention" to changing prices in the American housing market, if only because such prices do impact consumer spending and economic growth - areas that are most definitely on the Fed's radar screen. "To use interest rates to try to puncture the housing bubble would be a disastrously bad idea, and Bernanke obviously agrees, because he's not going to come close to doing that," Alan Blinder, a former Fed vice chairman, tells Bloomberg." Bernanke's hands-off approach has "been his position for years, since he was an academic," Blinder added. It's more likely that the Fed will study stock market fluctuations and bank activity in order to determine interest rate decisions. "A much better approach for the Fed in dealing with problems of financial markets is from the microeconomic point of view," Bernanke said today. "For example, we pay a lot of attention to the supervising of banks to make sure that they are taking sound policy, making sound loans."
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3. Gas Prices Continue to Plummet There is some good news at the pumps to start the workweek, as gasoline prices continue to drop. According to the Lundberg Survey, which tracks prices at gas stations across the U.S., the weighted average price of gasoline fell to $2.27, down from $2.33 two weeks ago. Still, gas prices are $0.33 higher than they were on March 1, 2006, says Trilby Lundberg, publisher of the survey. "Among stations surveyed, the lowest average price in the country for regular unleaded was in Portland, Ore., at $1.99 a gallon," says the survey. "The priciest was $2.59 a gallon in Honolulu." Among California cities surveyed, Sacramento had the best price for regular at $2.31. The most expensive was $2.49 a gallon in San Diego.
4. Analysts Predict Stock Market 'Boomlet' Analysts are in general agreement that the stock market should see a run-up in prices this week after the financial markets made a poor showing in February. "I think we'll see an end-of-month advance next week," David Briggs, head of equity trading at Federated Investors, tells CNNMoney.com. "Most of the quarterly earnings are out and nobody is forecasting an earnings recession, no one is calling for an economic recession," he said. "The market is gradually earning its multiple. There's no real reason to sell." Meanwhile, oil prices could impact market trends for the week. With all the hoopla over the Dubai port issue, the attempted terrorist attack on Saudi Arabia and unrest in oil-rich Nigeria, oil prices rose last week. In addition, traders are wondering whether the Federal Reserve will raise interest rates, while retail store earnings are drifting downward.
"Yet, despite all these potential negatives for stock prices, the Nasdaq and S&P 500 ended the week with gains and the Dow Jones industrial average closed not far from the 4-1/2 year highs hit earlier in the week," says CNNMoney. "The week ahead could be even better, with the stock market likely to be supported by this same resilience, as well as the tendency for the first few days of March to be upbeat, according to the Stock Trader's Almanac." Still the market boomlet could be short-lived. "Longer-term I'm bearish, but I'm pretty optimistic for next week," said Ken Tower, chief market strategist at CyberTrader. "People have been wondering how many more bumps there will be in the Fed Funds rate, and I think we'll get some clarity on that," he said. "We'll also get more information next week to suggest a small slowdown in housing, but no steep decline." Tower added: "I think that will reassure traders and investors that the economy is still on an even keel, if not booming."
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