Last week, the Federal Reserve Board decreased the interest rate by 25 bps and this Thursday, during the congressional Joint Economic Committee testimony, the Fed chairman said the economy may possibly experience "noticeably" slower growth in the last quarter caused by housing slowing and falling in consumer and business spending.
House prices are still falling. In fact, the Case-Shiller index showed house prices dropped the most since the property crash of 1991. House prices are also said to decline by 2010 and start recovering in 2011. Also, people are expecting a slowdown on construction activity which is visible in the prices of lumber futures.
Consumer spending, which has been supporting the U.S economy since 2003, is also beginning to slow down. Surprisingly, in early November, consumer sentiment fell, hitting its lowest level in two years. Also, the latest ISM data showed a sharp drop in the import index which could be caused by a weaker dollar. The U.S. consumer may be hurt further as the latest rise in crude prices has not been fully reflected in gasoline prices due to a narrowing of crack spreads. Since consumption represents about 70 percent of the U.S. GDP a fall in consumer spending, especially in the holiday shopping season, could have a big impact on growth.
Stocks in U.S. fell to the lowest level in two months with banks announcing more write downs due to sub-prime home loans and fear that some companies could suffer from a slowdown in customer spending and rising prices of oil. So far, of the 87 financial companies that have reported third-quarter earnings, more than a third missed Wall Street expectations.
Until recently, the weak dollar hasn’t been considered a threat to the U.S. economy. Yet, the decline has become so visible and so sustained that risk of imported inflation increased remarkably, particularly in the wake of growing prices of energy and commodities. In these circumstances the Fed may be pressed to raise interest rates to save the falling dollar and cut inflation at the time when rate cuts would be more.