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Reflections on the U.S. economy 2006-12-21 The U.S. economy is, without question, at a transition juncture. We’ve seen lots of widely divergent viewpoints in the markets--- from market economists, market practitioners to the policy maker---the Fed. Regarding the outlook in 2007, most market economists seem to agree that, in the first half, the economy shall be continuously moderating with the downturn of housing market and the Fed shall sit on the sideline with respect to the rate policy. However, the economists seem to be widely divided with respect to the outlook and Fed’s potential actions in the second half of 2007. One of the camps predicted that, after keeping the Fed Funds Rate unchanged for the 1st half, the economy shall rebound starting from the second quarter and the Fed will return to the tightening mood again in the second half. JP. Morgan’s Chief Economist, Bruce Kasman seems to lead this optimistic camp. His arguments include: the current housing downturn seems to be very narrowly based—just a sector-related shock, which have not yet spread to other financial markets and the labor market; the backdrop of the healthy global economy shall not be ignored; he foresees that 2% and plus of the core inflation rate won’t go away in 2007 due to higher unit cost of labor. On the other side of the augment, the economists tend to underline the spillover effects from the housing market in the next year. They noticed the labor market had started to be negatively affected, especially in the housing related areas and some manufacturing sectors. Moreover, as the economy slows down, the inflation shall diminish further. The markets seem to support this view, at least, at this juncture. The Fed Funds Future market, so far, predicted zero percent chance that the Fed will raise rate for the whole 2007. However, it did show 23%-42% possibilities of rate cuts between May and the end of 2007. As for the Treasury yield curves, the inversion has been existent between 3-month and 10-year with averaged 32 bps from August to November in 2006, which reflected that the fixed income market has been betting a further slowing-down going forward as well.The bond market’s Guru---PIMCO’s Bill Gross even predicted the Fed would cut the rate by up to 1% for 2007. In his view, over time, the U.S. housing market downturn would exert more downward pressure on the overall U.S. jobs market and consumer spending, potentially pushing up the jobless rate.In my personal view, for the most part, the recent softness in this US economy has been confined to the housing and automotive sectors where weakening demand created an excess of inventories that hindered the order flows and in turn let to cutbacks in production. The key question to be answered here is---- whether the housing market slump will remain to be barely sector-based or will it spread to other sectors and consumer spending and, hence, dent the overall economy? Interestingly enough, up to now, the growth in the much larger service sector remains relatively strong; the labor market still stays healthy. I noticed that the data-dependent Fed tried to balance its bias between the economic slowing-down and inflation in its recent FOMC minutes. In this regard, I would think the Fed will hold the rate for a while and watch the data very closely. All in all, I think the strength of the job market in 2007 will be more and more important on Fed’s radar screen. I also think, as the economy paces down, the inflation shall continue to retreat, potentially providing an opportunity for Fed to re-evaluate its rate policy.

ECONOMIC REPORTJob growth accelerates to 167,000 in DecemberAverage hourly earnings jump 0.5%; jobless rate remains at 4.5%PrintE-mailDisable live quotesRSSDigg itDel.icio.usBy Rex Nutting, MarketWatchLast Update: 4:10 PM ET Jan 5, 2007WASHINGTON (MarketWatch) -- Job growth in the U.S. unexpectedly accelerated in December, with nonfarm payrolls rising by 167,000 and the jobless rate remaining at a very low 4.5%, the Labor Department reported Friday.Job growth was much stronger than the 100,000 expected, dashing fleeting hopes held by some that the Federal Reserve would cut interest rates soon. "The underlying recovery remains intact," wrote Steven Wieting, an economist for Citigroup Global Markets, in a note to clients. "We continue to believe that monetary policy is on hold for the foreseeable future," Joshua Shapiro, chief economist for MFR Inc., wrote in an email following the "solid report." Bonds and stocks sold off on the news. The odds of a rate cut in the first half of the year fell to 52% from 86% before the data, according to the Chicago Board of Trade's federal funds market. See Market Snapshot. Job growth in the previous two months was revised higher by a total of 29,000. Economists had expected job growth to slow from November's upwardly revised 154,000, especially after Wednesday's ADP employment report, which showed a 40,000 decline in private-sector payrolls. See Economic Calendar. Joel Prakken, president of Macroeconomic Advisers, which computes the ADP index, was unapologetic about the big discrepancy between the ADP and government numbers, saying he wouldn't be surprised if the government's data were revised lower. "We aren't trying to forecast the initial estimate," Prakken said, "we are trying to get it right." The government said Friday that payrolls grew by 1.84 million in 2006, an average of 153,000 per month. Revisions to be published next month will likely increase that total significantly. Growth averaged 136,000 a month in the final quarter of the year. Fed researchers have said the economy needs to add about 100,000 jobs per month to absorb new entrants into the workforce and maintain a steady unemployment rate. With strong job growth in 2006, the jobless rate fell from 4.9% at the beginning of the year to 4.5%. Read the full release. Average hourly earnings jumped by 8 cents, or 0.5%, far ahead of the 0.3% rise expected. Over the past 12 months, average hourly earnings have increased 4.2%, more than double the inflation rate and the fastest growth since late 2000. With productivity slowing, the acceleration in earnings will keep Fed officials focused on inflationary pressures in the tight labor market. On the other hand, faster wage growth should also support consumer spending, keeping growth on track. December's job growth came in strong despite losses in three key sectors: Construction, manufacturing and retail. Construction jobs fell by 3,000 after seasonal adjustment. Residential construction jobs fell by 16,000, but those losses were partially offset by gains in nonresidential construction. Manufacturing jobs dropped by 12,000 in December, the sixth consecutive decline. In the past year, factory jobs have fallen by 72,000. The losses in December were concentrated in autos, primary metals and textiles. Of 84 manufacturing industries, 44.6% were adding jobs in December. "This is terrible news," said Peter Schiff, president of Euro Pacific Capital. "The problems of the U.S. economy are just getting worse. We destroyed 12,000 goods-producing jobs." Retail firms cut 9,000 jobs after seasonal adjustment. Retail jobs fell by 58,000 in 2006. Jobs were added in most every other sector. Of 278 industries, 58.6% were adding jobs in December. Job growth was strong in professional services, which added 50,000 workers in December and 420,000 in all of 2006. Health care added 31,000 jobs in December and 324,000 in the year. Employment in food services increased by 23,000 in December and 304,000 for the year. In the separate survey of households, the government reported employment gains of 303,000 in December and an increase in unemployment of 23,000 to 6.85 million. In 2006, the household survey indicated job growth of 3.14 million. The labor-force participation rate (the percentage of adults working or looking for work) rose to 66.4% from 66.3%. The employment-population ratio (the percentage of adults working) rose to 63.4% from 63.2%. That's the highest employment rate since September 2001. . Rex Nutting is Washington bureau chief of MarketWatch.

2006年12月21日的英文新闻:Reflections on the U.S. economy 2006-12-21 The U.S. economy is, without question, at a transition juncture. We’ve seen lots of widely divergent viewpoints in the markets--- from market economists, market practitioners to the policy maker---the Fed. Regarding the outlook in 2007, most market economists seem to agree that, in the first half, the economy shall be continuously moderating with the downturn of housing market and the Fed shall sit on the sideline with respect to the rate policy. However, the economists seem to be widely divided with respect to the outlook and Fed’s potential actions in the second half of 2007. One of the camps predicted that, after keeping the Fed Funds Rate unchanged for the 1st half, the economy shall rebound starting from the second quarter and the Fed will return to the tightening mood again in the second half. JP. Morgan’s Chief Economist, Bruce Kasman seems to lead this optimistic camp. His arguments include: the current housing downturn seems to be very narrowly based—just a sector-related shock, which have not yet spread to other financial markets and the labor market; the backdrop of the healthy global economy shall not be ignored; he foresees that 2% and plus of the core inflation rate won’t go away in 2007 due to higher unit cost of labor. On the other side of the augment, the economists tend to underline the spillover effects from the housing market in the next year. They noticed the labor market had started to be negatively affected, especially in the housing related areas and some manufacturing sectors. Moreover, as the economy slows down, the inflation shall diminish further. The markets seem to support this view, at least, at this juncture. The Fed Funds Future market, so far, predicted zero percent chance that the Fed will raise rate for the whole 2007. However, it did show 23%-42% possibilities of rate cuts between May and the end of 2007. As for the Treasury yield curves, the inversion has been existent between 3-month and 10-year with averaged 32 bps from August to November in 2006, which reflected that the fixed income market has been betting a further slowing-down going forward as well. The bond market’s Guru---PIMCO’s Bill Gross even predicted the Fed would cut the rate by up to 1% for 2007. In his view, over time, the U.S. housing market downturn would exert more downward pressure on the overall U.S. jobs market and consumer spending, potentially pushing up the jobless rate. In my personal view, for the most part, the recent softness in this US economy has been confined to the housing and automotive sectors where weakening demand created an excess of inventories that hindered the order flows and in turn let to cutbacks in production. The key question to be answered here is---- whether the housing market slump will remain to be barely sector-based or will it spread to other sectors and consumer spending and, hence, dent the overall economy? Interestingly enough, up to now, the growth in the much larger service sector remains relatively strong; the labor market still stays healthy. I noticed that the data-dependent Fed tried to balance its bias between the economic slowing-down and inflation in its recent FOMC minutes. In this regard, I would think the Fed will hold the rate for a while and watch the data very closely. All in all, I think the strength of the job market in 2007 will be more and more important on Fed’s radar screen. I also think, as the economy paces down, the inflation shall continue to retreat, potentially providing an opportunity for Fed to re-evaluate its rate policy.

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