[icantstandit]

Economy Slows Sharply, Inflation Heats Up

By Fred Barbash
Washington Post Staff Writer
Friday, July 28, 2006; 10:46 AM

Economic growth slowed significantly in the spring, the Commerce Department reported today, lending support to the view on Wall Street that the country is shifting into lower economic gear in the wake of spiking oil prices.


The gross domestic product -- the broadest measure of the nation's economic activity -- grew at an annualized rate of 2.5 percent in the second quarter of the year compared to 5.6 percent in the first quarter, a rate considered aberrational.
Today's figures represent an advance estimate and are likely to change as firmer information arrives. The estimated rate was nevertheless considerably below the estimates of economists, who forecast a growth rate closer to 3.2 percent.
The same numbers released today also suggested a pickup in the pace of inflation, with prices paid by Americans increasing 4.0 percent in the quarter versus 2.7 percent in the first quarter.


Excluding food and energy prices, the price index for gross domestic purchase increased 2.9 percent, compared with an increase of 3.0 percent in the first part of they year.
Separately, the Labor Department reported today that labor costs rose 0.9 percent, more than expected, during the first quarter, also an inflationary trend.


The downturn in GDP growth, the Commerce Department said, primarily reflected downturns in spending across the board -- by consumers, businesses and government.
Today's figures -- inflationary trends coupled with slowing growth -- only create more uncertainty about whether the Federal Reserve's Open Market Committee will or won't boost interest rates again at its Aug. 8 meeting.


Fed policymakers were unsure after their last meeting in late June about what they would do next, according to minutes of the session released yesterday.
The Federal Open Market Committee raised the central bank's benchmark short-term rate to 5.25 percent from 5 percent in June, its 17th consecutive increase in two years. The vote was unanimous, but one member thought that increase "was a close call," according to the minutes, which summarize the discussions without identifying participants by name.
And the group believed additional credit tightening "at future meetings was not foreordained," the minutes said.


"Obviously, today's GDP figures add to the growing evidence that the real economy is slowing sharply," wrote Paul Ashworth, senior international economist for Capital Economics. "Nonetheless, on balance we still expect that the Fed will raise rates one more time in early August as insurance against higher inflation taking hold."
Noting the decline in consumer spending, economist Peter Morici of the University of Maryland's Robert H. Smith business school said, "Higher interest rates, higher oil prices and mounting debt are burdening consumers. With the housing market cooling, consumers are no longer able to use the equity in their homes to finance ever larger purchases of clothes, electronics and other goods and services," he said in a written note.



(This is unfortunate. I hope this does not lead to an economic downturn. It is too early to tell, but the indicators seem to be pointing to a downturn. How does it feel for those of you in business?)

[GermanBJJ]

Feels great. Maybe these new numbers will keep the Fed from overshooting (again.)

[KingSnake]

Originally Posted by GermanBJJ

Feels great. Maybe these new numbers will keep the Fed from overshooting (again.)

Am I the only one who thinks the fed is nuts to use the interest rate to curb inflation caused by rising energy and commodity costs?

[icantstandit]

Originally Posted by GermanBJJ

Feels great. Maybe these new numbers will keep the Fed from overshooting (again.)

You think they have been raising the rates too fast? I agree. Too much too fast.

[Matt]

I was reading this earlier today. This is pretty much cements that the Fed will not implement any further rate hikes. I'm hoping that mortgage rates will go down and that house values will go down slightly.

[clmetal]

this just says growth slows. still is a growing GNP. If the housing bubble finally bursts (as we have been hearing for years) then that will really impact things, new building (as much as i hate it) has become a large % of our economy

[Matt]

New housing starts have slowed, prices have flattened (even dropped 1% in San Diego), and there is more existing housing inventory on the market. I wouldn't say the bubble burst or that it will - I would just say that real estate is finally getting back to a more normal market status.

[Octavian]

Originally Posted by icantstandit

You think they have been raising the rates too fast? I agree. Too much too fast.

I also agree - but I also think that we have a critically dangerous amount of inflation right now and the Stock Market's value in particluar is far fetched and bloated beyond safe levels.... this growth to the 11 thousand mark is purely speculative and setting the economy up for a harsh wakeup call, more so than the one in this article, because as oil prices rise more they will eventually reach a certain level that trips a series of failures into progress.

[mysilentsigh]

Originally Posted by KingSnake

Am I the only one who thinks the fed is nuts to use the interest rate to curb inflation caused by rising energy and commodity costs?

what else should they do?

[Murdock4]

Originally Posted by Octavian

because as oil prices rise more they will eventually reach a certain level that trips a series of failures into progress.

this is very true.