Gross Domestic Product and Job Creation Slowing
Growth of real Gross Domestic Product (GDP) slipped to an annual rate of 2.6% in the second quarter of 2006, according to the “final” estimate released by the Commerce Department on September 28. This definitely was a below-trend pace with sobering implications for the labor market. Payroll employment rose by only 51,000 in September, but August was revised up substantially and average monthly job growth for the second quarter was a respectable 121,000. Core inflation still is running on the high side and business labor costs still are rising at a brisk pace. However, the evolving slowdown in economic growth and job creation should help keep unit labor costs in check, and the recent impressive fallback in energy costs will help stem the “leakage” of higher energy prices into the core.
The Federal Reserve and financial market participants apparently concur with this assessment. The Federal Reserve held short-term interest rates steady at the September 20 meeting of the Federal Open Market Committee (FOMC), maintaining the 5.25% target for the federal funds rate. This was the second consecutive holding action following 17 consecutive quarter-point rate hikes from mid-2004 to mid-2006. The public statement issued at the conclusion of the September 20 FOMC meeting highlighted the ongoing “moderation” in economic growth, the ongoing “cooling” of the housing market, and the likely moderation of currently “elevated” inflation pressures over time.
The way things are going, stable monetary policy is the best bet for the balance of this year and the early part of next year, and we’re expecting some monetary easing by mid-2007. The current monetary policy stance, the prospects for stable or even easier policy down the line, the slowdown in economic growth, and well-anchored inflation expectations have combined to generate an impressive bond market rally. Following the movement in the fed funds and 30-day LIBOR rates, yields on long-term Treasury securities have come down significantly from their mid-year highs, and those rates should remain close to current levels for some time.
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