Wednesday, May 30, 2007

FOMC Minutes

Here is a link to the Fed Minutes from May 9, 2007. Let's see how the Fed saw the economy a little under a month ago:

The information reviewed at the May meeting suggested that economic activity had expanded at a below-trend pace in recent months.

We pretty much already knew that.

The average monthly increase in payroll employment through the first four months of this year was well below the relatively strong pace recorded in the fourth quarter of 2006. In April, the construction industry continued to shed jobs, manufacturing employment declined further, and retailers reduced hiring after a large gain in March. The unemployment rate stood at 4.5 percent in April, similar to its average in the first quarter, and the labor force participation rate moved down.

This isn't that good, either. Weak job growth is always bad.

Industrial production increased at a modest annual rate of 1.4 percent in the first quarter, with the monthly pattern reflecting fluctuations in the output of utilities, which was influenced importantly by swings in weather conditions.

The Fed noted the last month was strong across the board, but that was only 1 month.

Real consumer expenditures increased at a brisk pace in the first quarter, although monthly gains in spending slowed over the course of the quarter, in part because of swings in weather-related outlays on energy goods and energy services.

This has been the real story of this slowdown -- the strength in consumer spending. It has remained strong for the last 4 quarters when other areas of the economy were slowing.

Residential construction activity remained soft as builders attempted to work off elevated inventories of unsold new homes.

I've covered this to death.

Real spending on equipment and software rose modestly in the first quarter after having fallen in the fourth quarter of 2006. Spending on high-tech equipment, boosted by a surge in outlays on computers, posted a substantial increase in the first quarter. In addition, purchases of communications equipment--which tend to be volatile quarter to quarter--rebounded strongly after a fourth-quarter dip. By contrast, spending on transportation equipment declined significantly:

One sub-area of business investment declined and one increased, making total growth "moderate".

Real nonfarm inventory investment excluding motor vehicles increased at a slower pace in the first quarter of 2007 than in the previous quarter. The downshift in inventory investment had helped to reduce the apparent overhangs that had emerged in late 2006.

In other words, business is stocking up on less stuff.

Economic activity in advanced foreign economies appeared to have grown at a steady rate in the first part of the year.

This is what may keep the US out of a recession. With a cheap dollar and the rest of the world's growth picking up, the US may be able to export enough to keep growth barely positive for the next quarter or so.

The total PCE price index rose substantially in both February and March. The advance in February was distributed across a broad range of categories, while the March increase was driven largely by a jump in the index for energy. Core PCE prices were unchanged in March after an upswing in February. Smoothing through the high-frequency movements, the twelve-month change in the core PCE price index in March was just a touch higher than the increase over the year-earlier period

OK -- I'll say this one more time. The Fed is not comfortable with inflation's current level. They've said it repeatedly for the last 6 months or so.

So -- where does this leave us?

1.) The economy is slowing, but we're not in a recession. While housing is slowing down, business investment is moderate and the consumer continues to spend at high rates. Job growth is weak. This makes Friday's number really important. Also remember, the 1st GDP revision comes out tomorrow.

2.) Inflation is too high for the Fed.

3.) Rates aren't coming own anytime soon.