National Economic Overview

1
National Economic Overview

• Alan D. Viard
• Federal Reserve Bank of Dallas

2
National economic overview

• Soft patch in Q4, rebound in Q1
• Pace of growth expected to moderate
• Consumer spending growth slowing
• Housing market cooling
• But, business investment picks up steam
• Mixed signals on inflation and inflation
  expectations

3
May 10 FOMC minutes

• http//www.federalreserve.gov/fomc/minutes/2006051
  0.htm (released May 31)
• Participants saw the economy as having rebounded
  strongly so far this year after the slowing of
  growth in the fourth quarter Although the
  expansion appeared likely to moderate, it
  evidently remained solid.

4
GDP growth rapid in Q1, expected to moderate
5
GDP believed to have surged in March(Macroeconomi
c Advisers May 15 monthly real GDP estimate)
6
Non-auto consumption, business investment add to
growth in Q4, Q1(contributions to change in GDP)
7
Job growth continued, but slowed, in April does
not reflect June 2 release
8
May 10 FOMC minutes

• Participants noted that growth of household
  spending was likely to slow over the remainder of
  the year some cooling of housing markets On
  balance, consumption spending was viewed as most
  likely to expand at a moderate pace in coming
  quarters.

9
Consumer spending continues to grow, but more
sluggishly
10
Housing permits and starts continued to decline
in April
11
Home sales remain below previous levels
12
May 10 FOMC minutes

• Participants remarked that business investment
  spending was robust Capital formation was
  likely to continue to be supported by rising
  output, strong balance sheets in the business
  sector, and ready availability of financing on
  attractive terms.

13
Core capital goods orders trend upward
14
Manufacturing output has risen in six of last
seven months
15
May 10 FOMC minutes

• Participants expressed some concern about recent
  price developments Core consumer inflation
  lately had been a little higher than expected
• Inflationary pressure from energy and commodity
  price increases, weaker dollar
• But, wages had been restrained and wide profit
  margins could accommodate wage increases

16
6-month core inflation rates have risen
significantly
17
but 12-month rates have shown less of an
increase
18
May 10 FOMC minutes

• Some surveys suggested that inflation
  expectations had risen in recent weeks, but
  others implied that expectations were little
  changed the TIPS spread had edged higher On
  balance, participants judged that inflation
  expectations had risen somewhat but remained
  contained.
• Expectations warranted close monitoring.

19
Short-term inflation expectations rise for
households, but not forecasters
20
Long-term inflation expectations may have edged up