Federal Reserve policymakers said Wednesday that the Federal Open Market Committee sees the “downside risks to the outlook for the economy and the labor market as having diminished since the fall,” meaning that the United States economy is firmly enough on the road to recovery that the central bank may begin scaling back its stimulus measures sometime this year. But, as the index of leading indicators rose less than expected in May, the economy may take time to accelerate further.
The Conference Board reported Thursday that its gauge of the economic outlook for the next three to six months rose just 0.1 percent — below analysts expectations for a 0.2 percent increase and far beneath the 0.8 percent gain recorded in April.
“Growth will depend on continued improvement in the housing market and an easing of consumer and business caution which would allow overall consumption and investment to gain traction,” noted Conference board economist Ken Goldstein, in the accompanying press release. “Cutbacks in public spending programs and the drag from foreign trade remain headwinds.”
The automated federal budget cuts that began on March 1 are projected to weigh on economic growth throughout this quarter. However, the rebound in housing prices, rising stock market returns, and the slowly improving job market mean households will likely sustain their spending, a segment of the economy that accounts for approximately 70 percent of gross domestic product.
“There are indications of a moderation in growth,” Credit Suisse economist Jonathan Basile told Bloomberg before the report. “The slowdown will be temporary. It’s just going to take some time for the economy to turn up.”
Moderate growth is the operative word in his comments. Just three of the 10 indicators in the leading index contributed to the overall increase revealed in the Conference Board’s report. The positives were stock prices, strong credit activity, and the interest-rate spread between the federal funds rate and the 10-year Treasury notes. Excluding these measures, the other indicators were flat to negative. In particular, the factory ready was mildly negative, underscoring the uncertain outlook for the manufacturing sector. Building permits were also negative even though the outlook for the housing market, highlighted by Thursday’s existing home sales report, is very strong.
Other measurements tracked by Conference Board showed similar incremental improvement. Its index of coincident indicators — a gauge of current economic activity that tracks payrolls, incomes, sales and production — ticked upward 0.2 percent after a 0.1 percent gain in the prior month and its index of lagging indicators edged up 0.3 percent after a 0.1 percent gain in April.
Taken together, all three of the Conference Board’s indices were consistent with the Federal Open Market Committee’s forecast: economic risks have diminished since the end of last year. But, with just a small increase in the board’s leading index, it may take some time for that prediction to materialize.
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