Fed Declares U.S. Economic Slack To Be 'Quite Elevated'

Last Updated May 21, 2010 12:29 PM EDT

The story got lost behind this week's horrendous stock market news, but the comments from the Federal Reserve Open Market Committee, combined with a few other data points, remind us that the U.S. economy is just limping along. I'm not qualified to predict with any accuracy a double-dip recession of the 1981 sort, but this recovery looks weak indeed.

Several discouraging reports came out this week:

1. New unemployment claims were higher than the experts had predicted, says Bloomberg:

Initial jobless claims rose by 25,000 to 471,000 in the week ended May 15, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level in a month, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance and those getting extended payments fell...
Applications were projected to drop to 440,000 from 444,000 initially reported for the prior week, according to the median forecast of 44 economists in a Bloomberg survey. Estimates ranged from 425,000 to 448,000. The Labor Department revised the prior week's figure up to 446,000.
There were no special factors behind the jump in claims last week, a Labor Department spokesman said.
And the four-week moving average has risen as well.

2. The Ceridian Pulse of Commerce Index, which makes inferences on the broad economy from the amount of fuel purchased by long-haul truckers, was weak for April:

The PCI in April fell 0.3 percent, suggesting the economic recovery may have stalled, although an uptick in consumer spending could continue to drive a slow but steady recovery. Year-over-year growth of 6.5 percent in the PCI marks the fifth straight month of steady increase at "better than normal" levels. However, year-over-year growth of 10 to 15 percent in the PCI is required to drive down the unemployment rate.
3. And inflation is very low, says the Bureau of Labor Statistics:
The index for all items less food and energy was unchanged in April, as it was in March. The shelter index and its major components of rent and owners' equivalent rent were all unchanged in April. The index for new vehicles was also unchanged. The index for airline fares increased sharply in April, rising 2.2 percent. The index for recreation rose 0.3 percent in April, the medical care index increased 0.2 percent, and the index for used cars and trucks rose 0.2 percent. In contrast, the apparel index fell 0.7 percent and the index for household furnishings and operations declined 0.5 percent. Over the last 12 months, the index for all items less food and energy has risen 0.9 percent.
In times of recovery, some inflation is to be expected, reflecting the competition for products and workers. Not this month, though.

Tying it all together are the FOMC's comments on the economy from its April 28 meeting. What caught my attention was the oxymoronic declaration that the U.S. is in a situation of "elevated slack:"

Participants' assessments of the risks to the inflation outlook were mixed. Some participants saw the risks to inflation as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. Others, however, saw the balance of risks as pointing to potentially higher inflation and cited pressures on commodity and energy prices associated with expanding global economic activity as an upside inflation risk; some also noted the possibility that inflation expectations could rise as a result of the public's concerns about the extraordinary size of the Federal Reserve's balance sheet in a period of very large federal budget deficits.
That sums it up pretty well: the U.S. economy is still in the tank, and apart from the normal inflation pressures that will come from an eventual recovery in real economic activity, the Fed faces big challenges in keeping the value of the dollar intact.

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