October 22, 2017

Orders for Durable Goods Increased Slightly in August

A separate report on Wednesday showed that Americans increased purchases of new homes in August after cutting back in July, suggesting that higher mortgage rates are not yet slowing the housing recovery.

The Commerce Department reported that orders for durable goods, items expected to last at least three years, edged up 0.1 percent in August. Such orders plunged 8.1 percent in July, largely because of a steep drop in volatile commercial aircraft orders.

The August orders were held back by a decline in demand for military aircraft and other military goods. That could be related to steep government spending cuts that took effect in March. Excluding military spending, orders rose 0.5 percent.

Auto factories reported a 2.4 percent increase in orders, the biggest in six months.

And demand for so-called core capital goods rose 1.5 percent, after falling 3.3 percent the previous month. Core capital goods are a good measure of businesses’ confidence in the economy and include items that point to expansion, like machinery.

Still, economists said the gains were not enough to reverse the declines in previous months.

“It was definitely a mixed month,” Jennifer Lee, an economist at BMO Capital Markets, said. “The gains in core orders and shipments in the month do not offset weakness in the last couple of months.”

Durable goods shipments rose 0.9 percent in August, after two months of declines. The shipment figures are used to calculate economic growth.

The pickup in core capital goods orders suggests production and shipments could rise in the final three months of the year.

“Third-quarter growth in equipment investment will be pretty weak, but the fourth quarter should be notably better,” said Paul Ashworth, an economist at Capital Economics.

In its separate report, the Commerce Department said sales of new homes increased 7.9 percent last month to a seasonally adjusted annual rate of 421,000. That comes after sales plunged 14.1 percent in July to a 390,000 annual rate.

The rebound in sales could ease worries that higher mortgage rates have started to damp sales. It coincided with the best month of sales for previously occupied homes in more than six years.

Some buyers may be racing to close deals before rates rise further. The average rate on the 30-year fixed mortgage has risen more than a full percentage point, to about 4.5 percent, since May.

New-homes sales were 12.6 percent higher in August than a year earlier, although the pace remains well below the 700,000 consistent with a healthy market.

The median price of a new home sold in August fell 0.7 percent from July to $254,600.

Sales rose in all but one region of the country in August, increasing 19.6 percent in the Midwest, 15.3 percent in the South and 8.8 percent in the Northeast. Sales plunged 14.6 percent in the West, the second month of declines.

Article source: http://www.nytimes.com/2013/09/26/business/economy/orders-for-durable-goods-rose-slightly-in-august.html?partner=rss&emc=rss

Economic Slowdown Is Expected, but It’s Seen as Fleeting

New data from the government due out Wednesday is expected to show that the economy came close to stalling during the spring quarter, which ran from April through June. But many experts say the latest slowdown is likely to be temporary. Buoyed by a healthier housing sector, a surging stock market and resilient consumer spending, they say, economic activity should rebound in the second half of 2013 and accelerate into 2014.

“We’ve been saying for some time that second-quarter growth would be the weak spot this year,” said Nariman Behravesh, chief economist at IHS. “This is the spring swoon. But I wouldn’t panic — there is a very specific reason for it, and it will start to wear off.”

“Housing has been sizzling and consumers are spending at a decent pace,” he added. “Businesses have held back so far, but will begin to get on board.”

But haven’t we heard that one before? The latest swoon looks a lot like the previous pauses that have prevented the economy from gaining much momentum since the recession ended in 2009.

Experts estimate that the economy grew at an annual rate of under 1 percent in the second quarter, half the already tepid pace of growth in the first quarter of 2013. Much of that weakness stems from the tax increases and automatic cuts in government spending that went into effect earlier this year, headwinds that should gradually ease in the quarters to come unless Washington makes things worse by cutting spending further or Congress and the White House send markets into a swoon by failing to agree on a painless way to raise the nation’s debt ceiling.

Federal Reserve policy makers, who are set to meet on Tuesday and Wednesday, will be closely analyzing these crosscurrents. The central bank has been purchasing $85 billion a month in Treasury bonds and government-backed mortgages — a program which the Fed’s chairman, Ben S. Bernanke, has hinted will be slowly wound down later this year if the economy proves strong enough.

The Fed is not expected to signal a change in direction when it issues its latest statement early Wednesday afternoon. The data on economic growth due out Wednesday morning, however, as well as the latest figures on employment that will be released by the Labor Department on Friday, could help determine whether the Fed begins tapering back as early as September or instead waits until December or even longer.

“The Fed will have a lot of information,” said Michelle Meyer, senior United States economist at Bank of America Merrill Lynch. “Our baseline scenario is that December is marginally more likely than September, but it is a very close call.”

Wall Street is intensely focused on when the Fed will begin easing back, and traders will be paying close attention to any change in the language of the Fed’s statement. In May and June, stocks fell after Mr. Bernanke seemed to suggest the tapering could begin soon.

Since then, though, Wall Street has bounced back and Mr. Bernanke emphasized in testimony before Congress earlier this month that the central bank was committed to bolstering the economy, easing fears of an abrupt tapering. In fact, he highlighted the risk that “tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect.”

Other questions are looming, too. Besides the issue of whether businesses will start investing at a faster pace, the recent rise in mortgage rates has some observers worried that the housing market could cool. The National Association of Realtors reported on Monday that its index for pending home sales dropped 0.4 percent in June, a sign buyers may be getting more cautious as borrowing costs increase.

More clues about the health of the housing sector will come on Tuesday, with the release of the latest figures in the S. P./Case-Shiller index for home prices. Economists are expecting the index for May to post a 12.3 percent gain over the same month a year earlier, a reflection of what has been a strengthening housing market in many parts of the country. The Conference Board is also scheduled to report its latest reading on consumer confidence on Tuesday.

Experts who are fairly optimistic in the long-term, like Ian Shepherdson, chief economist at Pantheon Macroeconomics, caution that Wednesday’s numbers on overall economic performance could look rather bleak.

“The second quarter was horrible, no matter how you slice it,” he said. “The crunch in government spending is holding back growth and it doesn’t just appear in the government component. It feeds pretty much into everything.”

Mr. Shepherdson is actually a bit more pessimistic about the current situation than many of his peers — he says he believes the economy grew at only 0.5 to 0.6 percent in the second quarter — but he emphasized that Wednesday’s report on gross domestic product was something of a wild card.

Inventory changes are hard to predict, as is the full impact of the cutbacks in Washington.

“We could be anywhere from minus 0.5 percent to plus 1.5 percent,” he said. “I wouldn’t be surprised if we saw a negative number.”

Even as economists on Wall Street, at the Federal Reserve and elsewhere study the data for the second quarter, government statisticians at the Commerce Department’s Bureau of Economic Analysis will also be undertaking a comprehensive revision of how they measure the economy itself.

The bureau will now count expenditures on research and development as akin to more traditional business investment, as well as make adjustments for the value of artistic property like movies and books. Pension plans will also be measured differently. It is the first revision of its kind since July 2009.

All together, these changes will affect reports of economic activity going back decades and are expected to increase the estimated size of the American economy by roughly $400 billion. That may be less than 3 percent of the nation’s $16 trillion in annual output, but it’s larger than the entire economy of dozens of countries.

And while no one will notice the difference in their own lives, in the world of economics, the bureau’s revision is a major event. “For numbers geeks like myself,” Mr. Behravesh said, “these changes are anticipated with great interest.”

Article source: http://www.nytimes.com/2013/07/30/business/economy/economic-slowdown-is-expected-but-its-seen-as-fleeting.html?partner=rss&emc=rss

News Analysis: Japan Courts Growth While Europe Keeps Up Austerity

Even as Europe fell deeper into what just became its longest recession since World War II, Japan posted an unexpectedly robust growth rate of 3.5 percent under the bold new stimulus measures championed by Prime Minister Shinzo Abe — precisely the medicine many have urged European leaders to take.

“The elites in Europe don’t learn,” said Stephan Schulmeister, an economist with the Austrian Institute of Economic Research. “Instead of saying, ‘Something goes wrong, we have to reconsider or find a different navigation map, change course,’ instead what happens is more of the same.”

He added, “Angela Merkel is not willing to learn from the Japanese experience,” referring to the German chancellor.

Since taking office in December, Mr. Abe has pushed a three-pronged program — called the three-arrowed approach in Japan — to end two decades of stagnation in the Japanese economy. It involves a strongly expansionary monetary policy, increased fiscal spending and structural changes to improve competitiveness; the first-quarter growth spurt suggests that his approach is already paying off.

Not only have exports improved, the logical outgrowth of a weaker currency, but consumer sentiment and household consumption also have risen. “The real economy is responding,” said Adam S. Posen, president of the Peterson Institute for International Economics in Washington. “The last five months, six months, there’s been a mini consumer boom. All the things that people said could never happen in Japan have turned around.”

He added: “Japan’s central bank is supporting recovery, and it’s working. The European Central Bank is supporting stagnation, and it’s working.”

The question is whether European leaders will learn from the Japanese, and the answer thus far appears to be no. Though it is early in Mr. Abe’s term, Japan may have found the recipe for successful economic stimulus, but Germany is barring the door to the European kitchen.

“In Germany the hostility toward those unconventional measures is greater than in any other European society,” said Heribert Dieter, a political economist at the German Institute for International and Security Affairs in Berlin. In his view, the question is whether a departure from austerity would provide anything more than a few months or even a few years of breathing space.

Other than more flexibility in the speed of budget cutting, there is little sign of a deep rethinking in Germany. If anything it feels as though Berlin is digging in its heels. “It would postpone the day of reckoning,” Mr. Dieter said. “It would not solve any problems.” The emphasis, in the German view, has to be on maintaining fiscal discipline while focusing on structural changes to restore competitiveness, the only one of Mr. Abe’s three arrows that the Germans seem prepared to pull from the quiver.

Many German economists argue that the period of retrenchment is nearing a conclusion, and that the gains promised for the pain of austerity are now right around the corner. “There’s no need for a special fiscal stimulus program,” said Michael Hüther, the director of the Cologne Institute for Economic Research.

Mr. Hüther pointed to signs of improved export performance in countries like Spain, Greece and Portugal as evidence that an upturn was nigh. “I’m optimistic that next year there will be a turnaround,” he said. “It’s not a good idea to join the Japanese program.”

The envy of the world in the 1980s, Japan suffered a real estate and stock market collapse that left it mired in a deflation trap, with falling prices and an economy alternating between anemic growth and contraction. Japan went through recessions in 2011 and 2012, shrinking at an annualized rate of 3.5 percent as late as the third quarter of last year.

After Mr. Abe’s Liberal Democrats won a landslide victory in December, Mr. Abe made good on his promise to increase public spending. The central bank increased liquidity and the yen has fallen by about 20 percent against the dollar this year, a boon to the country’s exporters. The Japanese stock market has soared, with the Nikkei 225 Index up more than 70 percent over the past year.

Article source: http://www.nytimes.com/2013/05/17/world/europe/japan-courts-growth-while-europe-keeps-up-austerity.html?partner=rss&emc=rss

Consumer Confidence Climbs to a 5-Year High

An increasingly upbeat view of the economy and the jobs market drove consumer sentiment to its highest level in more than five years in early November, while a jump in wholesale inventories suggested the economy grew more than initially estimated last quarter.

It was the fourth month that Americans adopted a rosier economic outlook, even as financial markets showed increasing anxiety on fear that the spending cuts and tax increases set to take effect in the new year could push the country back into recession.

Separate data from the government on Friday showed wholesale inventories rose in September by the most in nine months, prompting economists to raise their forecasts for third-quarter growth. Inventories are a key element of the government’s measure of economic growth and can highlight underlying strength or weakness.

The index of consumer sentiment from Thomson Reuters and the University of Michigan rose to 84.9 in November from 82.6, topping economists’ expectations for a reading of 83.

It was the highest level since July 2007. The measure of consumer expectations also hit the highest level in more than five years, rising to 80.8 from 79.0. Most interviews for the survey were done before Tuesday’s presidential election.

“It shows that the U.S. economy is on a decent footing heading into the so-called fiscal cliff,” said Joe Manimbo, a market analyst at Western Union Business Solutions in Washington. “There’s a lot at stake, and there’s a lot of momentum that could be lost if lawmakers don’t get their act together.”

The survey director, Richard Curtin, said the re-election of President Obama should not have an impact on overall expectations, but if Washington does not act quickly to avoid the $600 billion in automatic spending cuts and tax increases, consumers could face a shock.

But the chances of a comprehensive legislative solution to the tax increases and spending cuts before Jan. 1 are considered slight, and members of Congress have been looking for a temporary fix to buy time.

While a negative conclusion to the discussions poses a risk to confidence and spending, “uncertainty over the ultimate outcome doesn’t appear to have troubled consumers unduly thus far,” a Barclays economist, Peter A. Newland, wrote.

The Commerce Department reported that total wholesale inventories gained 1.1 percent to $494.2 billion, beating even the highest estimate in a Reuters poll of analysts.

JPMorgan and Barclays raised their estimates for third-quarter gross domestic product growth to 3.2 percent from 2.8 percent after the release of the report.

Article source: http://www.nytimes.com/2012/11/10/business/economy/consumer-confidence-climbs-to-a-5-year-high.html?partner=rss&emc=rss

Europe’s Debt Crisis Weakens Quarterly Growth

Most of Europe’s main stock indexes lost ground after the data suggested that the debt and economic problems in countries like Greece and Italy were infecting the rest of the 17-country euro zone. The crisis has led a number of governments to sharply cut spending while weathering market turmoil that has damaged business and consumer confidence.

President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany said on Tuesday in Paris that they would take steps toward a closer political and economic union in the euro zone and would work toward balanced budgets and debt reduction. But resolving the sovereign debt crisis would be much harder if the economies continue to stall or shrink. European markets were closed by the time the statement was issued, but American markets sold off after the news on worries over Europe.

Gross domestic product in the euro zone rose a mere 0.2 percent in the second quarter of 2011 from the first quarter, when growth had advanced by a healthy 0.8 percent, according to Eurostat, the European Union statistics agency. Quarterly economic growth across euro zone was the slowest since mid-2009.

G.D.P. growth in Germany, which has been the tractor hauling the rest of Europe, barely budged, rising only 0.1 percent from the first quarter, when the economy had expanded a robust 1.3 percent, the German Federal Statistical Office said. Quarter-on-quarter growth in the three months through June was well below forecasts of 0.5 percent. The German figures come after data on Friday showed that the French economy was at a standstill in the second quarter, leaving Europe’s two largest economies barely growing.

Because government revenue is directly tied to economic growth, the two pillars of the European economy may be less able — and less willing — to prop up the weaker members.

“It’s the biggest potential risk,” said Jörg Krämer, chief economist at Commerzbank in Frankfurt. “I don’t worry so much about a moderation of growth two years after a recession. What is different this time is the potential escalation of the sovereign debt crisis.”

European stocks initially fell sharply on Tuesday, but recovered late in the day. The benchmark indexes in Germany and France all closed down less than 1 percent, and the euro fell to $1.4407 from $1.4444.

The German economic rebound since the recession of 2009, driven by exports of cars, machinery and other goods to China and other emerging markets, has helped counterbalance weak economies in southern Europe. But if Germany slows for an extended period, the challenges posed by the European sovereign debt crisis will become that much more daunting.

Despite signs that austerity programs were hurting growth, debt-ridden governments probably have little choice but to continue to cut spending to persuade their creditors that they can meet their debt obligations. Equally important, the European Central Bank has made it clear that it would support Italy and Spain by buying their bonds only if they continued to cut their deficits.

The slowdown in Germany was caused by lower household consumption and construction investment, the German statistics office said. In addition, imports rose faster than exports and led to a buildup of inventories.

Mr. Krämer of Commerzbank said that a warm spring meant that construction projects in Germany had begun earlier than usual, subtracting some activity from the second quarter.

Germany had been enjoying a period of unusually high growth, during which the number of people employed rose 1.4 percent, to 41 million people from a year earlier, the German statistics office said Tuesday. Even with the slowdown in the second quarter, the economy still grew 2.7 percent from a year earlier.

The Federal Statistical Office revised its figures for previous quarters, which meant that, contrary to earlier data, German output remained below its peak in late 2008.

The slowdown was foreshadowed by earnings from companies like Siemens and Deutsche Bank that fell short of analysts’ expectations, reinforcing the feeling that the pace of German growth was flattening. Surveys of business sentiment have also pointed to slower growth.

Greece is already in recession, while growth in Spain slowed to 0.2 percent from 0.3 percent in the previous quarter.

Trade data from Eurostat contributed to the gloomy picture. Seasonally adjusted figures showed that exports and imports in the euro area slowed in June, while the trade deficit widened to 1.6 billion euros ($2.3 billion).

Article source: http://www.nytimes.com/2011/08/17/business/global/euro-zone-economy.html?partner=rss&emc=rss

High & Low Finance: For the Fed, a Narrowing of Options

It makes sense to think the pause in growth will be temporary. Part of the first-quarter slowdown was caused by a weakness in the growth rate of exports that should not endure as developing economies continue to expand. There was also severe weather, which if anything should accelerate second-quarter growth with catch-up spending. And military spending declined.

With all those things, the economy grew at a 1.8 percent annual rate, according to the first estimate released by the government on Thursday.

To make the case for a rebound even stronger, the commentary from companies reporting first-quarter earnings has generally been upbeat. They are continuing to see sales rise, and profits are looking good. They are more awash in cash than ever, and many of them say they plan to hire more American workers. The recent surprise in unemployment numbers has been in how rapidly they fell.

This week, even as the Fed was lowering its forecast for economic growth in 2011, it was also lowering its expectations for unemployment. It had no choice. Back in January the consensus among Fed officials was that the unemployment rate would be 8.8 to 9 percent in the final quarter of 2011. It has already fallen to 8.8 percent, and the new consensus, of 8.4 to 8.7 percent, could be far too pessimistic if companies mean what they say about hiring.

But there could be a sign of possible problems in, of all places, China.

China’s steel prices, which had been rising rapidly, started to slide in mid-February. They bounced back for a week after the earthquake and tsunami in Japan, but have slipped since then.

What does that mean? Maybe nothing. China’s steel market is a wondrous combination of socialism and capitalism. Chinese steel is mostly sold through markets where prices can bounce wildly, and traders seek to profit from volatility. There are few good statistics on such basic things as inventories, making markets nervous about any change in direction. The producers are mostly government-owned companies, often managed by local governments more interested in jobs than profits. (Can you imagine such a thing in a developed economy?)

So Chinese steel statistics must be approached with caution.

One interpretation of the slipping prices is that the pre-tsunami decline was just market noise, and that the decline since then represents a correct analysis that Japan will be importing a lot less steel as manufacturing is interrupted by parts shortages. There is talk that the Japanese economy will shrink at a rate of 5 to 8 percent in the second quarter.

A steel analyst I have trusted for many years, Michelle Applebaum, the managing partner of Steel Market Intelligence, an equity research firm, cautioned me against leaping to conclusions, but added that if the decline in Chinese prices continued, “then, of course, it would be indicative that their rate of growth is slowing.” China, she said, is “growing in a very steel-intensive way.”

That is a prospect that should make the world at least a little nervous. China grew at an annual rate of 9.7 percent in the first quarter, according to official statistics. Europe, meanwhile, seems determined to impose austerity and debt reduction at the same time the European Central Bank raises interest rates.

Think of China as the primary engine of world growth and Europe as a brake. The world may not grow much if that engine starts to stutter before the old primary engine — the United States — starts to rev up.

China’s government keeps vowing to do something to slow its inflation, and has been trying to discourage credit growth and reduce the volume of new construction projects. In the West, there has been general disbelief that it could possibly succeed. After all, by tying the renminbi to the dollar, China has effectively turned over its monetary policy to Mr. Bernanke and his colleagues, whose dual mandate of promoting American growth and fighting American inflation says nothing about stopping China from overheating.

China’s economy may well not be slowing. Perhaps the steel figures represent government efforts to hold down reported inflation by putting pressure on producers, à la President John F. Kennedy and United States Steel in 1962. But all good things come to an end, and someday China’s growth rate will slow. By then, the world may no longer need the help. But it does now.

The Fed has been doing everything it can to stimulate the American economy, but has been rewarded for its efforts with denunciations. Liberals gripe that it is not doing enough to bring down unemployment. Conservatives complain that it is encouraging inflation by printing money. To hear some of them tell it, Mr. Bernanke is a member of the Obama administration who is destroying the currency to help the president win re-election.

That is not how you would expect conservatives to view a man who used to be chairman of the Council of Economic Advisers under George W. Bush, but these days many Republicans view Mr. Bush as something of a heretic for raising government spending.

Monetary policy is clearly on hold now. Mr. Bernanke may or may not think it is a good idea to end the Fed’s purchases of longer-term Treasuries — the program known as QE2, for quantitative easing. But he had no choice, given the political realities.

The Fed is caught in a bind, with inflation rising and growth perhaps slowing. “A surge in commodity prices unavoidably impairs performance with respect to both aspects of the Federal Reserve’s dual mandate,” Janet L. Yellin, the Fed’s vice chairwoman, pointed out in her talk to the Economic Club of New York earlier this month. “Such shocks push up unemployment and raise inflation. A policy easing might alleviate the effects on employment but would tend to exacerbate the inflationary effects; conversely, policy firming might mitigate the rise in inflation but would contribute to an even weaker economic recovery.”

For much of the last two years, growth in federal government spending helped. But now, that spending is falling. And state and local government spending, adjusted for inflation, is at its lowest level in nine years.

The American outlook would be much worse if there really was much chance of a rapid reduction in government spending, as the politicians say they want. With the recovery stumbling, tighter monetary and fiscal policy could be disastrous. But it is probable that there will be no deal and that after a new episode of “The Perils of Pauline,” the debt ceiling will be raised and a temporary deal worked out that makes no one happy.

The risk is that if things do get worse, perhaps because that fall in Chinese steel prices really does mean something, the government will be impotent. Stalemate could keep fiscal policy in neutral or worse, and political pressures could prevent any monetary easing until it is far too late to prevent a new downturn.

Let’s hope that Mr. Bernanke is right to think both the slow growth rate of the first quarter and the rise in inflation are transitory phenomena.

Article source: http://feeds.nytimes.com/click.phdo?i=a1b17f4ed4234ad88ff230a3eb0a86d2

High & Low Finance: Slower Growth, Higher Prices: Tight Spot for the Fed

It makes sense to think the pause in growth will be temporary. Part of the first-quarter slowdown was caused by a weakness in the growth rate of exports that should not endure as developing economies continue to expand. There was also severe weather, which if anything should accelerate second-quarter growth with catch-up spending. And military spending declined.

With all those things, the economy grew at a 1.8 percent annual rate, according to the first estimate released by the government on Thursday.

To make the case for a rebound even stronger, the commentary from companies reporting first-quarter earnings has generally been upbeat. They are continuing to see sales rise, and profits are looking good. They are more awash in cash than ever, and many of them say they plan to hire more American workers. The recent surprise in unemployment numbers has been in how rapidly they fell.

This week, even as the Fed was lowering its forecast for economic growth in 2011, it was also lowering its expectations for unemployment. It had no choice. Back in January the consensus among Fed officials was that the unemployment rate would be 8.8 to 9 percent in the final quarter of 2011. It has already fallen to 8.8 percent, and the new consensus, of 8.4 to 8.7 percent, could be far too pessimistic if companies mean what they say about hiring.

But there could be a sign of possible problems in, of all places, China.

China’s steel prices, which had been rising rapidly, started to slide in mid-February. They bounced back for a week after the earthquake and tsunami in Japan, but have slipped since then.

What does that mean? Maybe nothing. China’s steel market is a wondrous combination of socialism and capitalism. Chinese steel is mostly sold through markets where prices can bounce wildly, and traders seek to profit from volatility. There are few good statistics on such basic things as inventories, making markets nervous about any change in direction. The producers are mostly government-owned companies, often managed by local governments more interested in jobs than profits. (Can you imagine such a thing in a developed economy?)

So Chinese steel statistics must be approached with caution.

One interpretation of the slipping prices is that the pre-tsunami decline was just market noise, and that the decline since then represents a correct analysis that Japan will be importing a lot less steel as manufacturing is interrupted by parts shortages. There is talk that the Japanese economy will shrink at a rate of 5 to 8 percent in the second quarter.

A steel analyst I have trusted for many years, Michelle Applebaum, the managing partner of Steel Market Intelligence, an equity research firm, cautioned me against leaping to conclusions, but added that if the decline in Chinese prices continued, “then, of course, it would be indicative that their rate of growth is slowing.” China, she said, is “growing in a very steel-intensive way.”

That is a prospect that should make the world at least a little nervous. China grew at an annual rate of 9.7 percent in the first quarter, according to official statistics. Europe, meanwhile, seems determined to impose austerity and debt reduction at the same time the European Central Bank raises interest rates.

Think of China as the primary engine of world growth and Europe as a brake. The world may not grow much if that engine starts to stutter before the old primary engine — the United States — starts to rev up.

China’s government keeps vowing to do something to slow its inflation, and has been trying to discourage credit growth and reduce the volume of new construction projects. In the West, there has been general disbelief that it could possibly succeed. After all, by tying the renminbi to the dollar, China has effectively turned over its monetary policy to Mr. Bernanke and his colleagues, whose dual mandate of promoting American growth and fighting American inflation says nothing about stopping China from overheating.

China’s economy may well not be slowing. Perhaps the steel figures represent government efforts to hold down reported inflation by putting pressure on producers, à la President John F. Kennedy and United States Steel in 1962. But all good things come to an end, and someday China’s growth rate will slow. By then, the world may no longer need the help. But it does now.

The Fed has been doing everything it can to stimulate the American economy, but has been rewarded for its efforts with denunciations. Liberals gripe that it is not doing enough to bring down unemployment. Conservatives complain that it is encouraging inflation by printing money. To hear some of them tell it, Mr. Bernanke is a member of the Obama administration who is destroying the currency to help the president win re-election.

That is not how you would expect conservatives to view a man who used to be chairman of the Council of Economic Advisers under George W. Bush, but these days many Republicans view Mr. Bush as something of a heretic for raising government spending.

Monetary policy is clearly on hold now. Mr. Bernanke may or may not think it is a good idea to end the Fed’s purchases of longer-term Treasuries — the program known as QE2, for quantitative easing. But he had no choice, given the political realities.

The Fed is caught in a bind, with inflation rising and growth perhaps slowing. “A surge in commodity prices unavoidably impairs performance with respect to both aspects of the Federal Reserve’s dual mandate,” Janet L. Yellin, the Fed’s vice chairwoman, pointed out in her talk to the Economic Club of New York earlier this month. “Such shocks push up unemployment and raise inflation. A policy easing might alleviate the effects on employment but would tend to exacerbate the inflationary effects; conversely, policy firming might mitigate the rise in inflation but would contribute to an even weaker economic recovery.”

For much of the last two years, growth in federal government spending helped. But now, that spending is falling. And state and local government spending, adjusted for inflation, is at its lowest level in nine years.

The American outlook would be much worse if there really was much chance of a rapid reduction in government spending, as the politicians say they want. With the recovery stumbling, tighter monetary and fiscal policy could be disastrous. But it is probable that there will be no deal and that after a new episode of “The Perils of Pauline,” the debt ceiling will be raised and a temporary deal worked out that makes no one happy.

The risk is that if things do get worse, perhaps because that fall in Chinese steel prices really does mean something, the government will be impotent. Stalemate could keep fiscal policy in neutral or worse, and political pressures could prevent any monetary easing until it is far too late to prevent a new downturn.

Let’s hope that Mr. Bernanke is right to think both the slow growth rate of the first quarter and the rise in inflation are transitory phenomena.

Article source: http://feeds.nytimes.com/click.phdo?i=c44a1d7065f4279444ef96c923b8b5c2