The stock market has faltered a bit as the Dow Jones industrial average approaches the 11,000 mark, but forecasters say the economy is growing solidly into 2006 despite some nervousness over holiday retail sales.
Even as residents are allowed to return to New Orleans' Ninth Ward for the first time since Hurricane Katrina devastated the Gulf Coast, the negative economic impact of the record-breaking storm season already seems to be behind us.
Friday’s report that employers added 215,000 jobs in November — the strongest month since July — merely confirmed what a ream of data released earlier in the week already had suggested: The economy is expanding solidly even as consumer spending weakens after a summertime car-buying binge.
There are still plenty of long-term imbalances to worry about, including the economy’s over-reliance on a housing boom that is at last showing signs of fading.
But for now even some of the most skeptical forecasters are coming around to the view that the economy is heading for a “soft landing” of steady, moderate growth even as the Federal Reserve continues to bring down the curtain on an era of unusually cheap credit.
“While there is still no shortage of concerns on the worry list, the bottom line really is that the overall macro news has not really been that bad,” said David Rosenberg, chief North American economist for Merrill Lynch, and a self-described skeptic.
The prospect for steady economic economic growth and decent corporate profits at least in the first half of 2006 has driven a six-week stock market rally that finally petered out this week, but not before propelling the Dow and other broad market indicators well into positive territory for the year.
“I think (investors) are feeling much better about growth prospects now and profit prospects,” said Mark Zandi, chief economist for Economy.com. “Inflation will edge higher, but the Fed will be able to keep it under control.”
Some of the most encouraging data of the week showed that U.S. factories have plenty of unfilled orders on the books, meaning they will continue to drive economic growth even as consumer spending weakens after a car-buying frenzy fueled by deep discounts.
Orders for big-ticket durable goods spiked 3.4 percent in October, more than expected, and the backlog of unfilled orders has risen for six straight months. A closely watched monthly survey of manufacturers showed a slight decline in activity but still indicated a healthy expansion for factories with relatively lean inventories that will have to be rebuilt in the months ahead.
It all adds up to a “virtuous cycle” of rising production, growing employment and increasing spending, said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co.
The latest housing data also were surprisingly strong, given the widespread view that the housing boom is past its peak and some bubbly markets are due for a correction, especially as mortgage rates head higher.
Sales of new homes surged to a record high, and the government’s quarterly assessment of housing prices showed a 12 percent year-over-year increase. But sales of existing homes, adjusted for normal seasonal variations, slowed to their lowest level since March, and the inventory of unsold homes is rising.
No need to panic, according to industry officials.
“We are returning to more balanced markets between home buyers and sellers, one that places buyers on a more even footing,” David Lereah, chief economist for the National Association of Realtors, said in a news release. “We feel confident that housing is landing softly as rates continue to rise.”
Investors are still a bit jittery about Christmas season retail sales despite an opening weekend that generally was described as strong. November retail sales figures published this week show that consumers are responding to deep discounts, with Wal-Mart growth outpacing rival Target for the first time in more than a year, while general department stores posted their weakest results since July, according to Economy.com.
“I think the markets were pricing in a far worse than an average season a couple of months ago, after the hurricane,” said Jeff Kleintop, chief investment strategist for PNC Advisors. “So far it has come in a little bit ahead of last year. That has bolstered confidence that the Fed has engineered a soft landing — if in fact they conclude their tightening phase soon.”
That is still a big if, although it seems a certainty that after 12 straight rate hikes the central bank is a lot closer to the end of the tightening cycle than to its beginning in June 2004. In fact investors were encouraged last week by minutes of the Fed’s Nov. 1 meeting, which showed that policy-makers were discussing new language that could be used as they wind down the rate-hike campaign.
“Some (Fed committee) members expressed concern about raising interest rates too high, and that is a worry that every investor shares,” said Hugh Johnson of Johnson Illington Advisors. “Now there is evidence they will not make that mistake.”
Still the Fed is considered almost certain to raise short-term rates another quarter-percentage point at its Dec. 13 meeting and again Jan. 31, when Chairman Alan Greenspan will lead his final meeting of policy-makers.
Crescenzi said the relatively strong economic data this week has made another rate hike likely in March, at least in the view of futures traders.
That would bring the overnight lending rate to 4.75 percent, compared with 1 percent in June 2004. Tighter credit is aimed at keeping growth at its long-term rate of 3 to 3.5 percent. The economy grew at a 4.3 percent in the third quarter, when consumer sales were boosted by generous car deals, but GDP is likely to be far lower in the fourth quarter, in part because of Hurricane Katrina and other damaging storms.
“You have to look through the Katrina-induced volatility,” said Johnson. “If you do look you see an economy that is a process of slowing, but slowing to a sustainable pace, and that is good news.”