Federal Reserve & Interest Rates

The July records indicated lower job gains than 2006, the unemployment rate remained at 4.5%. More recent reports indicate 4,000 jobs across the country were lost in August. This is making some economists nervous about possible recession. Some are taking it as an indicator that the subprime-mortgage sector is taking a toll on the entire economy. The report from the Bureau of Labor Statistics may not be sufficient evidence to support a serious downfall in employment. Other economic data indicates continued economic uncertainty. Take a look at a recent market update.

The report to Congress shows that consumer spending slowed for the first half of the year. High energy prices and reduced home appreciation are contributing factors in household wealth. While DPI (disposable personal income) generally rose, by 4 ¾% in the first quarter, inflation depleted the difference and average DPI lowered in April.

Household finance data indicates a rise in debt that is slightly higher than the rise in personal income. Financial strains on the household level is what is contributing to the subprime mortgage sector downward spiral.

In the Business Sector “Corporate profits remain robust, businesses have ample liquid assets at their disposal, and conditions in financial markets remain supportive.” Profitability in business finance looked fairly secure.

The report shows that International Trade weakened in the first quarter. Exports of goods and services slowed in increase to 2 percent in the first quarter from a strong 16 percent in the fourth quarter last year. Imports rose at 5 1/2 %. With prices of imported goods rising, overall real imports lowered in the second quarter.

Investors seemed optimistic about the economic outlook in the early spring. Market stability and treasury liquidity had some minor tremors with the subprime mortgage dip, but overall the financial markets held steady.

Right now the financial market is experiencing a bit of falling. Slips in the DOW have investors aching for an interest rate drop. A reduction in the rates could possibly be in the works with the nerve-racking dips in recent market reports. The Fed will probably hold off on a reduction depending on the next week of performance in the markets. The next FOMC meeting is on the 18th of this month.

The dollar plummeted in value with the Euro at $1.3864. The British pound is up at $2.0340. Imports have already slowed for autos and industrial supplies. International trade will remain unbalanced until export demand increases.

For more details download the full report from the Federal Reserve website.

Every year the Federal Reserve is required to submit a two part report to Congress. The first part consists of the Monetary Policy and the Economic Outlook. The second part is the Economic and Financial Developments of the year. The annual report for this year was released on July 18th. Here are some important details from the first part of the report for 2007.

Monetary Policy and the Economic Outlook

According to the published report, the United States economy did well for the first half of the year. Overall inflation remained at 4.5 %, but overall inflation rose greatly due to energy and food costs.

Homebuilding contracted due to stock imbalances stemming from the fourth quarter last year. There is still a high number of unsold new homes. The sub-prime mortgage sector is having problems. It seems to me that the time to buy a home is in this season, if your credit is in order. With the pressure on the market, some sellers are lowering prices. At the same time, if you have a sub-prime credit score or weak financial history, times will be harder for you to get low rate mortgages, or any mortgage at all.

The residential real estate market is slowly folding. With all the foreclosures lower local property values, investments in this area is looking pretty bleak.

Service-producing industries experienced increases and therefore assisted job growth. On the goods and manufacturing side, however, employment slowed.

Financial market conditions are fairly stable and economic expansion is still a strong possibility. Expectations are that the economy will experience some expansion for the second half of 2007 and first half of 2008. Even so, the value of the dollar in the foreign exchange market has slightly decreased.

Major variables of concern for the economic outlook are resource utilization and its affect on inflation as well as the decrease in housing construction. One positive variable is consumer spending increases and the continued export demand in the foreign market.

Changes in monetary policy are dependant upon the projections of inflation and economic growth over the next year and a half. As of this time, the current policy will remain in place.

Inflation projections say that a 2% rise is likely over the next two quarters, and then a 1 3/4 % drop in 2008. Unemployment is predicted to increase by ¼% by the fourth quarter. Wages should increase over the next year and a half.

Nonresidential building investments look are expected to expand, despite the decline in the residential property market.

I will later get into the Economic and Financial Developments section of the report to Congress.