March 25, 2023

Fed Sees Boost From Housing Rebound and Auto Sales

WASHINGTON (AP) — A strengthening housing recovery and robust auto sales contributed to moderate economic growth across the United States in late February and March, according to a Federal Reserve survey released Wednesday.

Growth was moderate or modest in all of the Fed’s 12 banking districts, and it accelerated in two — New York and Dallas — from January and early February.

The survey suggested that the economy performed better in March than some government data on hiring and consumer spending had indicated. That could mean the economic weakness might have been temporary.

The Fed survey, which is based on anecdotal reports, found that hiring was unchanged or improved slightly compared with the previous report. And it noted that consumer spending — which drives most of the economy — grew modestly. But the report also said higher taxes and a spike in gas prices had slowed sales.

By contrast, the Labor Department said earlier this month that job growth slowed sharply in March. And retail sales declined in March by the most in nine months, a separate report said last week.

Dana Saporta, an economist at Credit Suisse, said the survey “is consistent with the larger picture of steady if unspectacular growth.”

“We get caught up in the monthly volatility of the data, and we need to step back,” she said.

Zach Pandl, an economist at Columbia Management, an investment firm, said the survey’s rosier tone is probably one reason that several Fed policymakers have recently expressed optimism despite sluggish economic data.

The Fed survey said the recovery in home construction is gaining momentum and creating more construction jobs. It’s also boosting factory output of housing-related goods, such as lumber.

The report did note some weak spots. Several districts said manufacturers of defense-related goods had cut jobs in response to government spending cuts that started taking effect March 1.

Still, it said that growth overall was moderate, an upgrade from the “modest to moderate” pace in the previous two reports.

The Fed report, called the Beige Book, provides an overview of economic conditions from Feb. 22 through April 5. The information will be discussed along with other economic data during the Fed’s next policy meeting April 30-May 1.

At that meeting, most analysts expect the Fed to maintain its low interest rate policies but take no new steps. The Fed is expected to stick with its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent. And it will likely continue buying $85 billion a month in Treasury and mortgage bonds to try to keep long-term rates low and encourage borrowing, spending and investing.

Debate has heated up among Fed policymakers about when to start curtailing the bond-buying program, which began last fall. At their last meeting March 19-20, a majority of Fed officials said they favored continuing the bond purchases at least through the middle of this year. But many members indicated that they want to start winding down the program before year’s end, as long as hiring and the economy continued to improve.

Since that meeting, some government reports had suggested that the economy weakened in March. Employers added only 88,000 jobs in March, a sharp slowdown from average gains of 220,000 in November through February. And consumers cut back on spending at retail stores and restaurants last month, a sign that higher Social Security taxes might have made more Americans cautious about spending.

Still, reports on housing and autos continue to signal strength. In March, builders broke the 1 million mark on homes started for the first time since June 2008. The increase in the seasonally adjusted annual rate for March was fueled by a surge in apartment construction.

And U.S. auto sales rose to 1.45 million in March, their highest level since August 2007. Car sales fell slightly from last March, but pickup sales jumped 14 percent.

Economists forecast that the economy grew at a 3 percent annual rate in the January-March quarter, a healthy rebound from a scant 0.4 percent increase in the fourth quarter. But most now think growth will slow sharply to about 1.5 percent in the April-June quarter.

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Fiat Turns to High-End Production

Sergio Marchionne, who is chief executive of both companies, outlined a recovery plan that was fundamentally different than Fiat’s rival, Ford, which last week said it would shutter three plants in Europe. Both Fiat and Ford reported Tuesday higher losses in Europe, though overall profit rose because of healthy sales in the United States and elsewhere.

Instead of closing Italian factories, which have been producing fewer than half as many cars as they could, workers there will focus on producing Alfa Romeos, Jeeps and Maseratis, Mr. Marchionne said. Those premium Fiat brands have higher profit margins, but they must significantly increase their sales for the plan to succeed. Production of lower-priced Fiats will be shifted to countries where costs are lower.

“Building things is a lot more exciting than retrenching,” Mr. Marchionne said during a conference call with analysts Tuesday. Referring to the revival of Chrysler, he said, “We have to do it one more time.”

It has become increasingly clear that the decline in European auto sales, which have fallen 20 percent in the past five years, is more than just a temporary slump. Ford said Tuesday that it “believes the changes in the European business environment to be structural, rather than cyclical, in nature.”

The crisis in the auto industry has emerged as another threat to European stability because of the number of jobs at risk. The car industry employs about two million people in Europe, plus millions more who depend indirectly on automakers.

Last week, Ford announced plans to close three factories in Europe and eliminate 5,700 jobs. Analysts have predicted that other European carmakers would be compelled to follow suit. But Mr. Marchionne said that it made more sense to keep Fiat plants open.

Closing factories “would have relegated us to being a minor player in Europe because of the social delocations,” he said. “I’ve run the numbers both ways. This is the best economic choice we can make.”

Fiat reported Tuesday that its net profit globally more than doubled to €286 million, or $370 million, in the three months through September. Revenue rose 16 percent to €20.4 billion as the company sold more than a million vehicles.

But the company, based in Turin, said it would have lost €281 million in the quarter without profit from its Chrysler unit, which on Monday reported an 80 percent increase in earnings.

Mr. Marchionne’s decision to keep open the Italian plants was a surprise. As recently as September, at the Paris Motor Show, he had been lamenting Europe’s failure to do something about factories that have been operating at a fraction of their potential. The underused factories are ruinous for carmakers because companies must continue to pay fixed costs like worker salaries and maintenance.

The decision is good news for Italy, which is in recession and struggling to maintain its credibility with international bond investors. When car plants close, the damage quickly spreads to suppliers and the regional economy, costing tens of thousands of jobs and undercutting tax revenue.

Even as he expressed optimism that Fiat brands can win a share of high-end markets now dominated by BMW, Mercedes and Audi, Mr. Marchionne painted a grim picture of the European auto market.

Sales in Italy, the company’s core market, will be the lowest since 1979, Fiat said. Although Fiat closed a factory in Sicily last year, the company’s Italian plants are producing less than half as many cars as they could if they were running three shifts a day. Fiat will not break even in Europe until 2015 or 2016, Mr. Marchionne said.

In characteristically colorful terms, he acknowledged that it would be difficult for Fiat to break out of its dependence on less expensive, small cars. “It is shark-infested waters and you’re bound to lose some parts of your anatomy,” Mr. Marchionne said.

At the same time, Mr. Marchionne said, Fiat and Chrysler plants outside Europe were operating at full capacity, opening a chance for Italian factories to produce for export. He outlined plans to introduce seven new Alfa Romeo and six new Maserati models by 2016 that would be made in Italy for sale outside Europe, including the United States. In addition, he said, a new Jeep model would be produced in Italy for export beginning in 2014.

Fiat’s control of Chrysler allowed the company to return to the American market and means “we are no longer a marginal player,” Mr. Marchionne said.

“We now face the future together as a four million-plus vehicle producer,” he said. “The opportunities that are available to both of us now are opportunities that neither of us would be able to extract on our own.”

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Economix: Economists Lower G.D.P. Forecasts for 2nd Quarter

Quarter after quarter and month after month, the United States has been subjected to increasingly disappointing economic numbers. And this quarter is no different.

In light of a streak of bad news — on jobs, auto sales, housing, manufacturing
and retailing – many economists have ratcheted down their estimates for gross domestic product in the second quarter. A small selection:

  • Macroeconomic Advisers is now forecasting 2.6 percent annualized growth, down from its forecast of 3.7 percent about a month earlier.
  • Barclays Capital has lowered its forecast to 2 percent, from 3.5 percent.
  • IHS Global Insight is expecting 2 percent.
  • Joshua Shapiro of MFR is predicting (gulp) 1.5 percent, about half of what he’d previously expected.

You may recall that the same phenomenon occurred last quarter, when, for instance, Macroeconomic Advisers gradually slid its estimate down from 4.1 percent to 1.5 percent. The Commerce Department eventually reported that the economy grew at an annual rate of 1.8 percent last quarter. (The government will release its initial estimate for second quarter G.D.P. on July 29.)

Then, as now, economists said not to despair because they expected growth to pick up “next quarter,” since “temporary factors” were responsible for the latest bout of slowness. But then those hopes were scuttled, and pushed off until tomorrow and tomorrow and tomorrow.

Let’s hope the sun comes out sometime soon.

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