When Federal Reserve Chairman Alan Greenspan delivers his midyear update to Congress next week, he is unlikely to linger over the economy’s uninspiring performance in June.
Employment growth fell far short of forecasts, retail sales were sluggish and industrial production fell. Since Greenspan and his Fed colleagues raised interest rates for the first time in four years June 30, a battery of weak economic reports has roiled financial markets, raising the prospect of an economic slowdown in the final months of a hotly contested election campaign.
But a month’s worth of mildly weak economic data is unlikely to shake Greenspan’s determination to continue raising rates over the next year or so — nor should it, analysts say.
“I think June was a particularly difficult month for the economy, but it was more a speed bump than an indication the economy is about to falter,” said Mark Zandi, chief economist for Economy.com.
Forecasters long have expected the economy to slow from the red-hot 6 percent growth rate of last year’s second half. After all the nation’s consumers, who account for 70 percent of economic activity, are no longer benefiting from the double-espresso shot of a federal tax cut and mortgage refinancing wave.
Still, the latest evidence of slowing growth has been a bit startling, especially in consumer spending.
Auto sales went into a ditch in June, with makers of cars and light trucks reporting the worst monthly sales pace in six years. Some analysts said rising gasoline prices were to blame, discouraging would-be buyers from test-driving that shiny new gas guzzler. Others said an experimental effort by automakers to reduce rebates and other incentives backfired.
Efraim Levy, who follows the industry for Standard & Poor’s, said automakers already have boosted incentives again in their unending quest to maintain market share. But the June downturn raises the question of whether consumer demand for vehicles has at last been satiated by nearly three years of zero-interest loans and attractive rebate offers.
“That is the billion-dollar question,” Levy said.
“People are not buying vehicles at this point because they need vehicles,” said Morningstar analyst Phil Guziec. “They are buying them because they feel good, and the incentives make the price right.”
But even excluding autos, retail sales unexpectedly dropped 0.2 percent in June, marking the second time this year that the core retail sales figure has turned negative. That pattern is virtually unprecedented during a Fed tightening cycle, said Merrill Lynch chief North American economist David Rosenberg.
A research note from ISI Group, an influential institutional brokerage, suggested that consumer spending remained sluggish in the first half of July, putting further pressure on retail stocks, CNBC reported.
“The economics community may view this as a blip, but you really have to go back almost two decades to find the last time this happened in the context of an expanding economy,” Rosenberg said in a research note.
Rosenberg is right about one thing — most economists indeed view the recent soft data as a blip or even less.
“It’s not something to worry about,” said Goldman Sachs senior economist Ed McKelvey. “It’s something to file in your mind and watch the data, and if we see similar kind of evidence in July, then it would be something to worry about.”
In a research note, McKelvey predicted Greenspan will put the recent weakness into context by stressing the economy’s performance since his last formal report in February, when employment growth was still almost non-existent.
Even with the weak growth in June, employers have added over 1 million jobs over the past four months, signaling to the Fed that the time is right to steadily raise interest rates from their current, historically low levels.
Rising inflation also underscores the Fed’s plan to raise the benchmark overnight lending rate from the current 1.25 percent to a projected 3 percent or higher by sometime next year. Even though wholesale and retail inflation numbers were relatively modest this week, consumer prices excluding the volatile food and energy categories are up 1.9 percent over year-earlier levels, compared with the 1.1 percent rate reported earlier this year.
“There is a little more inflation in the system than the bond market indicates,” said John Silvia, chief economist for Wachovia Securities. “Inflation is not accelerating, it’s not taking off — it’s just rising.”
He said the inflation pickup is natural for a business expansion that is essentially entering its second year after a long period of hesitation.
While the pieces might be falling into place for Greenspan, the slowdown in growth is coming at an inconvenient moment for President Bush, locked in a tight contest with Democratic Sen. John Kerry.
Don Straszheim of Straszheim Global Advisors said he was not concerned by the recent softness but projected the economy going forward would be only “decent,” not strong. And that, he said, is not a good sign for Bush.
Over the past four decades, he said, strong employment growth generally has benefited the incumbent president, while weak employment has boosted the challenger. When economic conditions are more neutral, as they are now, the election tends to turn on non-economic issues, he said.
“I think the election is being served up on a silver platter for Kerry,” Straszheim said this week in a conference call for clients. “This looks increasingly like a 1968 kind of election cycle in which global issues swamp those domestic economic issues.”
Zandi of Economy.com agreed that Bush faces an uphill battle as he defends his economic record, especially in the battleground states of the Midwest, where the manufacturing sector has been hardest hit.
The recent softness “certainly makes things more murky for the president as we head to the election,” he said. “The economy is not going to be in full swing as we go to the polls as I think he had hoped. The question is whether the voters focus on the better economy of the past year, or the economic difficulties of the past four.”