The economy’s surge since the beginning of 2006 has created hundreds of thousands of new jobs, and some economists see activity pumping along on all cylinders. Yet doubts persist about the outlook, partly because the Federal Reserve has raised interest rates 15 times in less than two years – with expectations that more monetary tightening is written in the stars.
The strongest element lately has been the labor market, where optimism is growing among workers seeking to switch jobs. A fresh measure occurs Friday, with the April employment report.
Chicago economist Robert Dederick expects it to show a gain of 200,000 positions in the nation’s payrolls, on top of 211,000 a month earlier. He is expecting the jobless rate to drop to 4.6 percent, from 4.7 percent.
“The employment gains are a reflection of the economy’s very strong expansion in this year’s first quarter, but as we look forward, the Fed is worried that we are seeing too much of a good thing,” said Dederick, of RGD Economics.
The central bank’s steps to tighten monetary policy mean that the economy will be more subdued by the second half of this year, he added.
“We are seeing a slight loss of steam in home construction, and that could mean fewer jobs in the months ahead for those in the building industries,” Dederick said. “In the meantime, payroll expansion is not as robust as it was during the investment boom of the late 1990s.”
Last week’s tough talk about inflation from Fed Chairman Ben Bernanke created doubts about whether the central bank will soon call a halt in its campaign to raise interest rates. The Fed chief was unwilling to ignore upward pressures being created by energy costs, including gasoline above $3 a gallon.
Economist Eugenio Aleman says the Fed will raise short-term rates one more time, to a flat 5 percent, when central bankers meet May 10. At that point, he is looking for members of the Fed to take a pause. And Aleman, of Wells Fargo & Co. in Minneapolis, says doomsayers manage to overstate the effects of Fed tightenings.
“The Fed will always err on the side of caution,” Aleman said, “because keeping inflationary expectations down is “cheaper’ than trying to bring them back once they have changed.”
The stock market has inched forward on the heels of strong first-quarter corporate profits, which are running about 12 percent ahead of a year earlier.
At this point, investors should be encouraged by signs of a solid uptick in capital spending, says Chicago investment manager Marshall Front.
“Business outlays for new equipment are key to sustaining the economic expansion as consumer spending cools from a very torrid pace,” said Front, of Front Barnett Associates.
On the downside, he sees pressures on interest rates continuing, as part of a global trend.
“China has just raised rates and we may not have seen an end to higher rates in Europe. They also could rise Japan,” Front said.