Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
Let's look at this statement in more detail.
Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
Real personal consumption expenditures have been increasing. But
Unemployment is still high (although it appears to be topping out) and
Real disposable personal income is still weak.
I'm not sure I agree with the Fed's complete assessment of household wealth.
While housing wealth decreased in 4Q09
Wealth from financial assets increased leading to
An increase in household wealth.
In general, I think the biggest issue constraining further expansion of spending is the jobs market.
The Fed continued:
Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls.
Equipment and software investment rebounded nicely last quarter.
Non-residential fixed investment rebounded a bit, bit realistically won't be a major player in the expansion for some time.
Housing starts are still very depressed and
Employers aren't adding jobs yet.
Finally,
Bank credit topped at the beginning of 2009 and has yet to expand. But interest rates are still very low.
