June 16, 2010 in City

Economists get antsy as federal ‘juice’ dries up

Growth skeptics point to stalling construction
Greg Robb MarketWatch
Associated Press photo

Construction workers Arnulfo Medina, top, and Alfonso Del Castillo frame a home under construction in Louisville, Ky., earlier this month. Homebuilders are losing confidence in the housing market now that government incentives that spurred home sales have ended.
(Full-size photo)

Fed program offers CDs

WASHINGTON – The Federal Reserve has launched a new program that allows banks to set up the equivalent of certificates of deposit at the Fed.

In an operation conducted Tuesday, the Fed says banks will be paid 0.27 percent in interest on 14-day “term deposits” set up at the central bank.

It’s a new tool that will help the Fed drain money from the economy when it decides to tighten credit. The Fed has repeatedly said investors shouldn’t read the operation as a step toward higher borrowing costs.

A second operation will be conducted on June 28 for 28-day deposits. A third will be held on July 12, offering 84-day deposits.

Associated Press

WASHINGTON – The mixed bag of economic data released Tuesday shows a wobbly recovery in danger of being toppled over, analysts said.

Big questions remain in the U.S. about where growth will come from once “juice” from the government assistance fades, said Josh Shapiro, chief U.S. economist at MFR Inc.

This is not so bad, relatively speaking, given the state of the world’s richest economies.

“We’re still relatively better than a lot of other places,” Shapiro noted.

Still, worries persist. The homebuilders housing market index from June released Tuesday surprised economists on the downside, by falling to 17 in June from 22 in May, the National Association of Home Builders said. The decline comes at the end of a popular tax break for homebuyers.

The decline underscores that the housing sector “has hit an air pocket” as the tax breaks have ended, Shapiro said.

Such could be the fate of the overall economy. While growth in the second quarter may come in as high as a 4percent annual rate, where growth is going to come later this year remains an “open question,” Shapiro said.

Federal Reserve Chairman Ben Bernanke has been upbeat in recent weeks, saying he thinks the recovery is “sustainable” and that consumer and business spending will power growth forward.

Shapiro said that was more hope than reality: “He hopes it is sustainable.”

Shapiro expects the economy to slow to a 3percent growth rate in the second half of the year and then to a 2.5 percent rate in the first half of 2011.

In other data released Tuesday, the brightest was the first report on the manufacturing sector in June.

The New York Fed’s Empire State Manufacturing index edged higher, to 19.6 in June from 19.1 in May. While off the high of 31.9 in April, the report shows the sector remains solidly in positive territory, economists said.

Foreign investors gave another vote of confidence in the economy by sending strong flows of capital into the economy, according to the Treasury Department’s monthly data on international capital.

Foreign investors have sought refuge in safe-haven U.S. Treasury bonds and notes in recent months as the European debt crisis intensified, analysts said.

Also on Tuesday, the Labor Department released import price data for May that showed a firm 0.5percent gain in prices excluding fuel.

Other measures of inflation have been softening, and the firmness in the nonfuel import prices was a red flag to some economists worried about inflation.

Economists at RDQ Economics noted that the 12-month change in nonfuel import prices has picked up for 10 straight months, from -5.3 percent in July 2009 to 3.6 percent last month.

“We do not expect that this report will have a significant impact on the Fed’s thinking about inflation – especially given how dismissive Bernanke has been in the past on the impact of the exchange rate on inflation and given that the dollar has been firming – but we suggest keeping a close eye on the report in the coming months to evaluate underlying global inflation pressures,” the RDQ team wrote in a note to clients.

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