Popular Economics Weekly

The U.S. economy is now growing faster than the rest of the world. And the Fed just announced it will discuss a possible expansion of the size of its third round of bond buying and “better ways to guide markets about future policy actions” at this Wednesday’s FOMC meeting.

This is huge, and markets rallied on Monday’s announcement prior to the meeting because there is no other stimulus spending in the works with austerity causing recessions in Europe and even China slowing. So it looks like the U.S. will once again be the world’s engine of growth that prevents another worldwide recession.

Even Barron’s is sounding upbeat on future growth—at least according to the Levy Forecast. The U.S. is “improving its manufacturing, competitiveness, containing its depression, cleaning up private balance sheets, developing greater energy independence. (read abundant natural gas)…Furthermore, the people and government of the U.S. have withstood all kinds of military, political, and economic challenges without collapsing or losing their free markets or culture of innovations.”

In the case of the Fed, words can mean as much as actions, since no one wants to bet against our Federal Reserve—and by proxy the U.S. Dollar as the world’s preeminent reserve currency.

The biggest monetary-policy development since the last Fed meeting was that Narayana Kocherlakota, president of the Minneapolis Fed, also came out in support of more accommodative numerical targets. In what one Fed watcher called a plot twist out of an Alfred Hitchcock movie, Kocherlakota called on the Fed to hold interest rates at zero for another four years until the unemployment rate hits 5.5 percent. Only a few months earlier, Kocherlakota, a leading inflation hawk, had advocated a rate hike before the end of this year.

Two signs of greater growth ahead were boosts in retail sales and the Conference Board’s Index of Leading Economic Indicators (LEI). Housing prices are also rising again as inventory shortages are slowing sales.

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Graph: Econoday

The consumer was out spending more than expected in September—even after discounting gasoline prices.  Apple also appears to have bumped the numbers up.  Total retail sales in September advanced 1.1 percent after gaining 1.2 percent the month before.  Motor vehicle sales increased 1.3 percent after a 1.8 percent jump in August.

The best known predictor of future growth is the LEI, and the Conference Board’s index of leading indicators jumped in September but with help in August from a downward revision. The leading index increased 0.6 percent in September, following a 0.4 percent decline the prior month—originally down 0.1 percent.

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Graph: Econoday

And though existing-home sales are slowing because of falling inventories, the national median existing-home price for all housing types was $183,900 in September, up 11.3 percent from a year ago. The last time there were seven consecutive monthly year-over-year increases was from November 2005 to May 2006, according to the NAR.

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Graph: Calculated Risk

The Fed has made what amounts to a promise to not only keep interest rates low for years—maybe up to 4 years, if Fed Governor Kocherlakota is to be believed—until the unemployment rates drop substantially. This is a promise that not only the U.S., but the whole world will listen to given the Fed’s preeminence in supporting growth.

Harlan Green © 2012