Owings Mills, MD (PRWEB) February 9, 2006
The potential for another increase in the Fed Funds rate, philosophical changes with a new Fed chairman, and a worrisome declining trend in a major credit index could impact business and economic conditions in the spring, according to economic analysis from global trade credit insurer Euler Hermes ACI.
Euler Hermes ACI Chief Economist Dan North, in reviewing the Credit Manager’s Index (CMI) produced by the National Association of Credit Management, said that the economy continues to appear reasonably strong but shows a “worrisome downtrend.” “While the CMI currently indicates modest economic growth, it is down substantially from November 2005,” said North. “The manufacturing sector has fallen in seven of the last nine months – and six out of nine for services; in January, seven of 10 components fell in both the manufacturing and service sectors.”
North said the data reflects trends in some of the most recent macroeconomic data: weak fourth quarter GDP of 1.1%, a faltering housing market, and below expectations reports for the past two months for job creation and the Institute of Supply Management (ISM) Indexes. “Once again, high energy costs, rising interest rates, a flat yield curve, and a weakening housing market are the major drags on the economy,” he added. Meanwhile, consumers could hit a rough patch if their two sources of funding dry up – financing from home equity and credit cards, and incomes that are falling below consumption.
North expects that when the Federal Reserve Board meets again in March, new Fed Chairman Ben Bernanke will raise the Fed Funds rate by another 25 basis points. The move would provide an important signal to the economy and the financial markets about the Fed's dedication to fighting inflation and it would demonstrate a degree of continuity in leadership. “However, this forecasted increase may be the final interest rate hike in 2006, as the minutes of the more recent FOMC meetings indicate a bias toward ending policy tightening soon,” he said. “Bernanke might be averse to tightening policy given a slowing economy, a flat Treasury yield curve, and modest inflationary expectations.”
Several aspects of the new chairman’s approach to leadership bear careful observation, North said. Bernanke’s philosophy differs from his predecessor in that he is an advocate of inflation targeting – setting policy based solely on the rate of inflation. “Inflation targeting is potentially worrisome in that it could limit the Fed's flexibility to adjust interest rates in response to financial market crises or other changes impacting economic growth,” North commented. In addition, Bernanke’s poise and polish in the spotlight will determine his credibility – one of a central banker’s most important tools – to the financial markets and the economy. Greenspan was masterful in public appearances, and it may take some time for Bernanke to build up the credibility his predecessor wielded.
Nonetheless, North said the Fed transition is likely to be a smooth one. “The overall economic picture suggests one more interest rate hike in March and business conditions that could weaken in the spring given the possibility of a consumer slowdown and the trends in the CMI,” he concluded.
Euler Hermes ACI, North America’s oldest and largest provider of trade credit insurance, is the U.S. subsidiary of the Euler Hermes group – the partner for credit management solutions. The group produces a regular insight on global economic conditions. For more information about products and services offered by Euler Hermes ACI, visit http://www.eulerhermes.com/usa.
Euler Hermes is the worldwide leader in credit insurance and one of the leaders in bonding and guarantees. With 5,400 employees in 41 countries, Euler Hermes offers a complete range of services for the management of customer receivables. The North American subsidiary (Euler Hermes ACI) is headquartered in Owings Mills, MD. For more information visit http://www.eulerhermes.com/usa.Euler Hermes, a subsidiary of AGF and a member of Allianz, is listed on Euronext Paris. Standard & Poor’s rates the group and its principal credit insurance subsidiaries AA-.
Euler Hermes ACI Public Relations and Communications Specialist
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