Earlier today the Federal Reserve Board released minutes from the Federal Open Market Committee’s ("FOMC") most recent meeting, held on August 8, 2006. Having made some recent posts about the number of corporate defaults and bankruptcies predicted for 2007 (see earlier posts here and here), I thought you might be interested to see what the FOMC’s minutes had to say about current economic conditions and indicators about the economy’s future direction.
Here are a few key excerpts:
In their discussion of the economic situation and outlook, meeting participants noted that the slowing of GDP growth in the second quarter was generally in line with expectations, reflecting the continued cooling of the housing market, the restraining influence on demand of higher energy prices, and the lagged effects of past increases in interest rates. Going forward, output was expected to advance at a pace at or slightly below the economy’s potential rate of growth, but several participants noted that the annual revision to the national income and product accounts suggested this growth rate likely was lower than previously believed. Incoming information with regard to inflation had not been encouraging. Still, most participants thought that, with energy prices possibly leveling out, aggregate demand moderating, and long-term inflation expectations contained, core PCE inflation likely would decline gradually from its recent elevated level, though the upside risks to inflation were significant.
In their discussion of the major sectors of the economy, participants noted that residential construction activity had continued to recede over the past few months and cited the housing sector as a downside risk to the outlook for growth. The rate of new home sale cancellations, which was identified as an important leading indicator by some contacts in the construction industry, had spiked higher. Single-family housing starts and permits continued to fall, and inventories of unsold housing appeared to have risen significantly, pointing to continued slowing in this sector. Some participants observed that the slowing seemed to be orderly thus far, but it was also noted that in some areas of the country housing construction had experienced a relatively sharp fall. In general, participants expressed considerable uncertainty regarding prospects for the housing sector.
Meeting participants noted that the continued increases in energy prices and borrowing costs appeared to have restrained consumer spending growth in recent months. Contacts in the retail sector generally reported a continued slowing of growth in sales, although the situation differed somewhat by region and type of good or service. Reliable, comprehensive data were not yet available on recent house price movements, but the rate of appreciation appeared to be moderating and was likely to slow further in coming months. The slower pace of increase in housing wealth would restrain consumption growth, though by how much was uncertain. However, the financial condition of households, as judged by indicators such as bankruptcy filings and loan delinquencies, appeared to remain solid. Overall, consumption spending seemed likely to expand at a moderate pace in coming quarters.
Although business fixed investment in the second quarter was a little lower than had been expected, participants noted that this development appeared mainly to reflect the timing of purchases, particularly of transportation equipment, and not weakness in the underlying trend. Some participants noted that nonresidential construction had continued to strengthen, offsetting some of the contraction in residential construction. Looking forward, strong business balance sheets and high profitability were seen as supporting continued growth in expenditures on software and equipment. However, it was noted that if the reported slowing of increases in retail sales continued, businesses might trim capital spending plans.
In short, it’s unclear whether we’ll see the "soft landing" slowdown in growth that the FOMC expects, or a more significant housing-led downturn as some, such as Professor Nouriel Roubini of the NYU Stern School of Business, are predicting. Either way, these minutes discuss some of the key factors that are likely to influence the economy — and the Fed — in the coming months.
For those interested in reading the entire FOMC minutes (including the statement that many participants in the FOMC meeting viewed the August pause in raising interest rates as a "close call"), you can find them here.