US With Mixed picture has all eyes on Fed
New York (May 12) The US economy is sending out mixed signals, raising questions over whether it has hit a temporary soft patch or is facing a longer-lasting slowdown. Amid growing uncertainty, economists are focusing on the U.S. Federal Reserve's next move.
Boom to bust
Southern Texas is experiencing an economic downturn as the shale oil boom turns bust. ERG Resources is a recent casualty of the low oil prices. The oil exploration company filed for Chapter 11 bankruptcy protection at U.S. Bankruptcy Court in Dallas on April 30. At least five major shale oil businesses have gone belly-up in Texas so far this year.
Crude oil prices have rebounded to around $60 per barrel after sinking below $50, but the current price level is still too low for many shale oil producers to make a profit. Many of these companies were betting on $100 a barrel oil when they began drilling. With no signs of a quick rebound in prices, banks are reluctant to offer these companies bridging loans.
The number of jobs in Texas fell 25,400 from a month earlier in March, the first drop in 54 months. The state, which generates 9% of U.S. gross domestic product, "is at risk of slipping into a regional recession," warned Michael Feroli, chief U.S. economist at JPMorgan Chase.
Because cheaper crude oil lowers the price of gasoline, it can boost consumer spending. But so far, consumers appear to be using the windfall from lower gasoline prices to pad their savings. "We haven't seen the extra savings from lower gas prices translate into additional discretionary consumer spending," said Ajay Banga, CEO of credit card issuer MasterCard.
Many market watchers had high hopes for a robust U.S. recovery, but the country's economic engine seems to have stalled. Energy companies are suffering under low crude oil prices, consumer spending has been weak, due partly to bad weather, and exports dropped as the dollar strengthened. These factors led to a sharp slowdown in the U.S. economy in the January-March quarter.
Other data suggests the lull is temporary. According to real estate brokers in western Arizona, sales have been good this spring. "Buyers became active as March rolled in," one broker said. The National Association of Realtors reported sales of existing homes in the U.S. came to an annualized 5.19 million units in March, up 10% from a year earlier.
While it accounts for mere 5% of the country's GDP, housing investment plays a big supporting role in the U.S. economy. House purchase create a big ripple effect as new home owners buy furniture, appliances and other accouterments.
There are signs of prosperity to be seen. In California's Napa Valley, high-end wineries Stag's Leap and Opus One have expanded their wine-tasting rooms, the well-heeled of Silicon Valley flock to the wine country, about two hours' drive from the information technology capital. Unlike Texas, California's economy is doing well, adding 39,800 jobs in March, the highest of any U.S. state.
What will Yellen do?
With all the conflicting signals, U.S. economy watchers are focusing on when the Federal Reserve will raise interest rates. The extended period of ultra-low rates has boosted auto sales and encouraged low-income earners to take on debt. Meanwhile, the Nasdaq stock index hit a new high in April for the first time in 15 years. Federal Reserve Chair Janet Yellen last week warned share prices are overvalued, a highly unusual remark for the head of the U.S. central bank to make.
Financial markets had earlier forecast the Fed would raise rates in June, but that now looks unlikely. The focus has shifted to whether rates will be raised in September, according to Jan Hatzius of Goldman Sachs.
Since the global financial crisis set in in 2008, the Fed has taken a lead role in the U.S. economic drama, unleashing a flood of cash to keep the economy afloat. Fed officials will soon be looking to return to the director's chair and face a highly delicate policy handling.