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Mon, Oct 02, 2006 - Page 10 News List

Paradox behind excitement about US economic health

AP , WASHINGTON

To judge by the excitement on Wall Street, the US economy is in the rudest of health. The paradox is that the economy is posting some of its slowest growth rates in five years.

After relying for years on a booming housing market to generate wealth, US consumers are curbing their spending. With property sales and prices now sagging, one of the props to a post-2001 expansion has been removed.

According to analysts, however, other props remain that will limit the downside to the world's biggest economy heading into the final quarter of this year.

Corporate earnings have remained strong and cash-rich companies are in sound financial shape, "and that's one of the best bits of news for the US economy", Global Insight chief economist Nariman Behravesh said.

Even if some domestic sectors like housing are slowing, foreign demand for US goods is building as growth in Europe and Japan finally picks up. And if the residential market has cooled, commercial property is as strong as ever.

Lifted

A robust outlook for earnings has lifted Wall Street to levels last seen during the dot-com boom of the late 1990s. A widespread belief that the Federal Reserve will keep interest rates steady for the time being has helped.

On Friday, the Dow Jones index of blue-chip shares finished at 11,679.07, in sight of its all-time closing high of 11,722.98 reached in January 2000.

Once the Internet mania collapsed, the US economy slipped into recession in 2001. The current housing downturn has led some observers to fret anew about the "R" word.

But according to Behravesh, those fears are misplaced.

"If you really look at all recessions, we never had a housing-led recession. A recession is exacerbated by the housing downturn," he said.

"What happens is that the Fed is worried by inflation, they raise rates and it kills the economy -- and housing," Behravesh said.

Price pressures

The US central bank does have plenty to worry about on the inflation front. Even as national growth has waned from 5.6 percent in the first quarter to 2.6 percent in the second, price pressures have continued to build.

Data out on Friday showed the core inflation rate linked to consumer spending, excluding food and energy prices, rose to 2.5 percent on an annualized basis in August, the biggest monthly rise April 1995.

Years of sky-high oil prices would appear now to be feeding through to the wider US economy, as companies feel emboldened to pass on price rises to their customers.

But Friday's figures also showed household incomes rising faster than spending, Joel Naroff of Naroff Economic Advisors noted.

"Clearly, the consumer spending binge is coming to an end. With households dipping into savings for over a year, that is not surprising," he said.

"That plays into the Fed's argument that a moderating economy will restrain inflation," he said.

Most of the betting on Wall Street is that the Fed, after calling off a long-running campaign of rate hikes in August, will hold pat for some months before cutting borrowing costs next year.

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