Monday, July 30th, 2007
Will U.S. Economy’s Shift Into a Higher Gear Create Domestic Investing Opportunities?
By William Patalon III
Managing Editor
After being stuck in low gear at the start of the year, the U.S. economy accelerated and grew at a 3.4% clip in the second quarter, its strongest performance in more than a year, the Commerce Department said Friday.
For investors seeking out bargain-priced domestic stocks, the faster pace of growth could help reassure those currently on the sidelines - where they were driven after being spooked by the twin specters of tight credit and a housing market that just seems to keep getting worse. Business spending resumed its advance, and U.S. companies seemed to regain their footing overseas, boosting U.S. exports. Government spending also increased, which can benefit an economy exponentially because of an inherent “multiplier” effect.
Even so, consumers - which are to the U.S. economy what the Energizer Bunny is to batteries - “took five” during the quarter, taking a breather as they tried to deal with near-record gasoline prices and some very real fears about the depths of the housing market downturn. The fallout has included big jumps in foreclosures, as well as in late mortgage payments. Consumer spending accounts for as much as 70% of the U.S. economy’s activity.
The robust second-quarter report followed a first quarter in which growth crawled along at an anemic 0.6% rate, the slowest in more than four years. But the apparent turnabout failed to inspire investors. After plunging nearly 312 points on Thursday - its second-biggest loss of 2007 - the Dow Jones Industrial Average careened lower by another 208 points on Friday. Treasury Secretary Henry Paulson said the economy is fundamentally sound, but said the current market downdraft should serve as a “wakeup call” to investors who may be shouldering too much risk.
Economists had only expected the economy to grow at a 3.2% pace in the second quarter. The 3.4% expansion in GDP was the best showing since the first three months of 2006, when the economy raced along at a blistering 4.8% rate.
In some other good news, the government said Friday that inflation was moderating. The so-called “core” inflation rate - which excludes volatile food and energy prices - rose only 1.4% in the second quarter. That was a marked decrease from the first-quarter inflation pace of 2.4%, and was actually the smallest increase in four years.
That’s good news for the U.S. central bank. Federal Reserve Chairman Ben S. Bernanke has said that inflation remains the biggest threat the U.S. economy faces. If prices don’t recede as policymakers expect, the central bank’s entire interest-rate strategy.
The Fed has held the benchmark Federal Funds rate at 5.25% for more than a year, and most economists predict the central bank will keep rates there for the rest of the year - as long as the economy keeps gaining strength at a reasonable, sustainable rate, while inflation gradually recedes.
Some other economists actually believe that the Fed may even be able to start cutting interest rates late this year or sometime in the first part of 2008.
Unfortunately, there are far too many wild cards in play - any one of which could trump either of these upbeat scenarios and force an increase in interest rates that will stymie the economy’s rebound. There’s the ever-weakening dollar, which is right now helping exporters, but which if it continues, could ignite a serious wave of inflation by significantly boosting the rise of imports - whether in the form of raw materials or finished goods from markets abroad. If the Fed raises interest rates to bolster that weak dollar by drawing in foreign investors, the move could also well choke off the exports that are right now serving as a major support for the U.S. economy’s continued growth.
GDP report: http://www.bea.gov
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