Last Week

What's Keeping the Economy Up

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Sunday, December 10, 2006

The U.S. economy continues to pull off an impressive balancing act.

That certainly reflects the continuing strength and profitability of American business, as well as the success of the Federal Reserve's monetary policy, which has managed to let the steam out of an overheated economy without sending it crashing into recession.

It also reflects the optimism of American consumers, who have continued to borrow and spend, even against a backdrop of falling house values.

Certainly all the outward signs last week were encouraging. Job growth in November was a respectable 132,000. And while the unemployment rate last month rose a smidgen, that was less a reflection of job losses than of an increase in workers lured back into the market by rising wages.

Still, opinion is divided on where things go from here.

The consensus on the bond market is that the economy is likely to slow further in the first half of 2007, as the full impact of the housing slowdown and auto restructuring finally sink in. That's why investors are betting the Federal Reserve's next move will be to lower interest rates, probably early next year.

The Fed chairman, however, begged to disagree, telling a New York audience that the next rate move, if one comes soon, will probably be up, not down. While the core inflation rate, excluding energy costs, is finally coming down, Ben S. Bernanke said, inflation is still too high, and it risks getting higher because of those tight labor markets.

In that, he has some support from the stock market, where investor confidence is boosted by a steady stream of deals at premium prices. Last week's included another big real estate deal, a bank merger and whispers of a possible tie-up between Sirius and XM satellite radio companies.

A big wild card remains the dollar, which stabilized last week against both the yen and the euro after a sharp drop earlier in the month. Currency traders will be closely following this week's visit to Beijing by Bernanke and Treasury Secretary Henry M. Paulson Jr., who will push for a gradual rise in the value of the Chinese yuan as a step toward bringing down a big trade surplus with the United States.

But as the Economist magazine noted in its current edition, Paulson and Bernanke might just as well turn their attention to oil states of the Middle East, which like China peg their currencies to the dollar and, because of the recent spike in oil prices, are running an equally large trade surplus with the United States. Now those huge piles of petrodollars are being recycled into hedge funds and private equity pools, as well as a bubbly U.S. commercial real estate market.


© 2006 The Washington Post Company

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