CHICAGO – The final months of last year weren’t much to write home about, as the economy was staggered by the after-effects of deadly hurricanes, a spike in energy prices and auto sales that plunged off the asphalt.
Measures of the fourth quarter showed it barely growing, at a level only modestly ahead of the last recession four years earlier.
Chicago economist Robert Dederick said Tuesday’s revision of fourth-quarter gross domestic product will ratchet growth up to a 1.8 percent rate, evidence that things were slightly better than the 1.1 percent rate reported a month ago.
“There is no question that the fourth quarter was a bummer, even with that upward revision,” said Dederick, of RGD Economics. “Even if we blame temporary factors, it was a one-quarter bust.”
Since around the holidays, however, just about every measure of the economy has shown a spring in its step, he said.
“The situation has gone from deserving a tin medal to winning the gold,” he said. “After a cold snap in December, things are heating up.”
According to Dederick, the economy’s rate of growth has zoomed to around 5 percent. About the only downside: housing.
“There is no question that measurements of the construction industry are showing some warning signs,” he said. “But overall, the economy has gone from being a bit of a loser to an all-out winner.”
Hopes that the Federal Reserve would soon stop raising interest rates, after 14 steps upward over 20 months, are starting to become a will o’ the wisp. Recent reports about the job market and retail sales indicate that the central bank’s campaign to slow the economy is not yet complete.
If workers see that inflation is running at a 4 percent annual rate while they get 3 percent raises, “they will, sooner or later, ask for higher salaries or higher hourly wages, and the Fed governors know it,” said economist Eugenio Aleman of Wells Fargo & Co. in Minneapolis.
Translation: Additional rate hikes lie ahead, in March and May.
The stock market basked in the glow of fourth-quarter corporate profits that ran well ahead of expectations, driving equity prices to new 41/2-year highs. But a sizable chunk of the huge earnings gains was derived from oil companies. The question is whether profits have hit a peak and will soon subside.
Flossmoor, Ill., investment adviser Richard Evans is telling clients that the bull market has grown long in the tooth, and it’s time for caution.
“At this stage, the intensity of selling will become more of a problem,” he is saying in his latest market letter. “While the speculative phase is the most exciting, it also is the most dangerous. Stocks never look as bullish as they do right at the top.”
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(c) 2006, Chicago Tribune.
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