A month ago, we thought the Fed would remove the word "measured" from the report, in reference to the pace of rate increases. But that was before a round of weaker-than-expected economic data was released in the past few weeks. The Fed has to consider the following signs of a possible "soft patch" in the U.S. economy:
A disappointing 3.1% rise (annual rate, chain-weighted dollars) in first-quarter real gross domestic product, representing the slowest growth in two years and sharply below the 3.8% growth in the fourth
A 2.8% plunge in March durable-goods orders, after a sharp downwardly revised 0.2% drop in February (previously up 0.3%)
Continuing declines in surveys of consumer sentiment from the Conference Board and the University of Michigan.
Of course, not all the recent economic news has been discouraging. Two key pillars of the economy -- the housing and labor markets -- have held up pretty well. In particular, housing has shown surprising strength despite the recent rise in interest rates. March existing single-family homes rose 1%, to an annual rate of 6.89 million, the third-highest month on record. And new home sales surged 12.1%, to a record 1.43 million annual pace in March.
While recent nonfarm payrolls numbers have been disappointing, the average April reading for weekly initial claims for unemployment insurance is near 320,000 -- well below four of the prior five monthly readings. The claims data suggest the labor market is improving despite earlier weakness in payroll numbers. We expect the April employment report, scheduled for release May 6, to show that the U.S. economy added 180,000 jobs for the month.
Still, the weaker tone in the GDP, durable goods, and consumer sentiment releases makes it unlikely that Alan Greenspan & Co. will wish to signal any acceleration of tightening. We continue to expect the Fed to attain a "neutral" funds rate near 4.25% by yearend, but it now looks as though the pace will be a bit slower. Until and unless the Fed sees stronger employment growth or greater signs of inflation, we expect the central bank to stick with its slow pace of rate hikes. Bovino is a senior economist for Standard & Poor's