Economic Outlook
Glenn Rudebusch at the SF Fed thinks that we have dodged a bullet: that the decline in housing investment will not send the economy into a recession:
Economist's View: FRBSF: Economic Outlook:
- On balance, any spillover from the housing slowdown to the rest of the economy appears to have been offset by four important factors that are supporting growth. The first of these factors is the solid growth in employment, with associated increases in labor income. The solid pace of hiring this year raises questions about whether recent flagging GDP growth reflects a transitory lull rather than a substantial slowdown. The second factor supporting growth is the recent drop in energy prices. The third factor is the recent increases in equity markets, which bolster household wealth. And, finally, as the fourth factor, borrowing costs--especially conventional fixed mortgage rates--continue to be relatively low.
- A crucial question facing policymakers is how soon will core inflation return to a more comfortable level. One reason for cautious optimism is that inflation expectations appear to remain contained, as various indicators of these expectations are in the same range that has prevailed over the past two years. Therefore, this year's surge in price inflation has not changed the market's view about where inflation will eventually be returned to by the Fed.
In contrast, the upside risk to the inflation outlook from labor market pressures appears to have been growing. As the FOMC noted in its October 25 statement: "the high level of resource utilization has the potential to sustain inflation pressures." Since then, the labor market continues to tighten, and the unemployment rate fell to 4.4 percent in October, the lowest level since May 2001.
