WASHINGTON – Just as the Federal Reserve seems to be inching toward an interest rate hike because of the strengthening U.S. job market, its task is getting more complicated:
Several key sectors of the economy are flashing some signs of weakness.
Housing, manufacturing and consumer spending — the U.S. economy’s main driver — have been tepid of late. The pace of home building plunged in February. Factory output is slowing as a rising dollar makes U.S. goods costlier overseas and weakens exports. And retail sales remain sluggish, with Americans spending less at stores and restaurants last month.
The main engine of strength has been the U.S. job market. Employers have added more than 200,000 jobs for 12 straight months, and unemployment has reached a seven-year low of 5.5 per cent, a rate typical of a healthy job market.
Yet annual wage growth remains stuck at 2 per cent, a level that can’t support robust gains in consumer spending and home purchases. Recently announced pay increases by Wal-Mart, the Gap and other retailers have been modest and have yet to circulate through the economy. It’s hardly surprising, then, that critical pieces of the economy remain troubled almost six years into the recovery from the worst financial catastrophe since the Great Depression.
“We’re not in an economy that is fully firing on all cylinders,” said Gregory Daco, an analyst at Oxford Economics. “Wage growth is still hesitant, and that has been the key element holding back the recovery.”
Many economists blame, in part, snowstorms and freezing temperatures for the economy’s lacklustre winter. Their theory will be tested as spring arrives. If the economy fails to pick up, it may lack the vigour that Fed officials want to see before raising their key short-term rate from a record low near zero, where it’s remained since 2008.
On Wednesday, after the Fed ends a policy meeting, it’s expected to drop the word “patient” from a statement describing its outlook for a rate increase. That would signal its intent to link an eventual rate increase solely to the most recent economic data and not to a preset timetable.
Many investors expect a rate hike as early as June. But an increase that soon might require the economy to accelerate in the next few months — and possibly for unusually low inflation to rise closer to the Fed’s 2 per cent target rate.
“The picture is a little muddied right now,” said Daniel Silver, an economist at JPMorgan Chase. “The more data we get, the more we will know.”
Recent economic reports have led some analysts to downgrade their outlook for growth in the first three months of 2015. The forecasting firm Macroeconomic Advisers projects growth an annualized rate of just 1.6 per cent in the first quarter, down sharply from 2.2 per cent in the final three months of 2014 and from a galloping 4.8 per cent rate over the spring and summer.
Weather has previously derailed the economy. In January 2014, the “polar vortex” was enough to cause the economy to shrink during that year’s first quarter. This time, winter storms struck mainly in February, blanketing much of the Atlantic seaboard in snow drifts and ice.
“We’ve had snowfalls that have exceeded seasonable norms in many parts of the country,” said Anika Khan, a senior economist at Wells Fargo. “We should see some rebound in the coming months.”
On Tuesday, the government said the pace of housing starts plummeted 17 per cent in February from January’s rate. Home construction slid 56.5 per cent in the Northeast and 37 per cent in the Midwest, the two regions that endured the brunt of the winter storms.
But sales also fell 18.2 per cent in the West and 2.5 per cent in the South, evidence that steady job growth, cheaper energy and relatively low mortgage rates have yet to spur much construction.
A gauge of homebuilder sentiment issued this week by the National Association of Home Builders slipped for a third straight time to 53. Readings above 50 indicate that more builders view sales conditions as good, though the index showed a drop in buyer traffic.
Retail sales have fallen for three consecutive months. The declines in February occurred at electronics and appliances stores, in addition to restaurants and a category that includes department stores and big discounters such as Wal-Mart.
Lower gasoline prices have yet to spark more consumer spending. Instead, many Americans appear to be repaying debt and pocketing their gains, with the savings rate reaching its highest level in nearly two years.
Auto production has also slowed and is holding down overall factory output. Economists say additional consumer spending would be needed for factories to ramp up production.
The optimistic view is that continued strong hiring will produce pay increases and broader economic strength in coming months.
The jobs numbers “should be positive factors in terms of security and economic growth,” said JPMorgan Chase’s Silver. “But we haven’t seen it provide a nice boost so far.”