Economy Slows More Than First Expected

Headlines (Scroll down for complete stories):
1. Economy Slows More Than First Expected
2. Fed's Hoenig: Inflation Has Peaked
3. Kerkorian's GM Power Play
4. Jobless Claims Fall by 6,000

1. Economy Slows More Than First Expected

Economic growth was cut more than in half from the first quarter to the second quarter. U.S. gross domestic product grew at a 2.6 percent annual rate, compared to a 5.6 percent annual rate in the first quarter. The Commerce Department revised second quarter GDP down from the 2.9 percent it had estimated a month ago.

Commerce blames the cooling housing market for slowing growth in the economy. Investment in residential real estate fell at the fastest rate in more than a decade, tumbling 11.1 percent. That's the biggest quarterly drop since a 12.2 percent drop in the second quarter of 1995 and the third quarter in a row where spending on new homes declined, says the Commerce Department.

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"The housing issue is a bigger issue than many will give credit and we think GDP will be soft for longer than anyone expects," Robert Lutts, chief investment officer for Cabot Money Management in Salem, Mass., tells Reuters.

Rising home prices created rising equity and homeowners could easily tap that equity to finance their spending.

Now, that option is increasingly rare.

Therefore, a cooling housing market can directly as well as indirectly hurt the overall economy, including sectors such as manufacturing and retail.

However, a prominent Bush administration advisor disagrees.

Testifying before the Senate Budget Committee, chairman of the White House Council of Economic Advisers Edward Lazear said that the recent housing bust hasn't spread to the rest of the economy.

"It appears that the housing slowdown will be a significant drag on third-quarter growth," said Lazear, "It is important to note, however, that the weakness in the housing sector does not seem to be spreading to other sectors of the economy."

Plus, the Commerce Department said that corporate profit growth was meager. Corporate profits eked out a 0.3 percent growth in the second quarter, much smaller than the 2.1 percent growth estimated initially. In the first quarter, corporate profit growth was a remarkable 14.8 percent.

Business investment also fell in comparison to an earlier estimate and the first quarter. Non-residential spending grew 4.4 percent, compared to an estimated 4.7 percent and the 13.7 percent growth rate in the first quarter.

The GDP numbers also indicated that inflation is not exactly contained. The personal consumption expenditure price index jumped 4.0 percent, up from 2.0 percent in the first quarter.

Excluding food and energy, the Fed's favorite inflation indicator registered a 2.7 percent increase, up from the 2.1 percent first-quarter growth rate. That's the highest inflation rate since the first quarter of 2001.

The latest inflation numbers could give the Fed pause when it next meets. The Fed has held interest rates steady for its past two meetings, saying that its previous 17 rate hikes haven't fully worked through the economy. But if inflation still shows signs of resilience, the Fed won't be able to sit idly by.

Richmond Federal Reserve Bank President Jeffrey Lacker told Reuters prior to the release, "Growth is going to be a bit below par for a quarter or two, maybe longer, but I'm looking for it to return to potential next year."

Kansas City Fed President Thomas Hoenig said at an economic forum yesterday that he sees slowing growth in the next half of the year, an improvement early next year, but the economy will grow below potential.

(See below article.)

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2. Fed's Hoenig: Inflation Has Peaked

Kansas City Federal Reserve President Thomas Hoenig says inflation has peaked. Hoenig predicts that inflation will stabilize for the rest of the year and will then decline.

"The inflation numbers will stabilize and then continue to come down," Hoenig told an economic forum sponsored by the Tenth Federal Reserve District. Hoenig predicted "a 'very modest, but very steady' downtrend in the core consumer price index toward 2 percent," reports Reuters.

Core inflation is presently at 2.8 percent, higher than the Fed's comfort zone of 1-2 percent. According to Marketwatch, Hoenig is expecting core inflation to fall from 2.8 percent to 2.5 percent.

Hoenig also says that despite uplift in economic growth at the beginning of next year, the economy will grow below potential. Hoenig says the U.S.' growth potential is 3 percent, but that the economy will slow to 2-2.5 percent in the second half of the year and improve to 2.5-3 percent early next year.

"There is some slack in the economy," commented Hoenig. Hoenig says that the cooling housing market and the cumulative effect of 17 interest rate hikes are weighing on the economy. Housing and energy, according to Hoenig, are the two wildcards that may derail the economy.

The combination of falling inflation and low economic growth could lead to interest rate cuts next year.

Hoenig, who will have a vote in the Fed in 2007, stands behind the decision to stand pat on interest rates. "Actions we have taken in the past, in the first half of this year . . . are still working their way through the economy," Hoenig told the audience.

Editor's Note:

Inflation is even higher than the government reports. To read more about the government's manipulation of inflation data, check out our report, "The Inflation Lie." Go here now.

3. Kerkorian's GM Power Play

Kirk Kerkorian announced today that his company, Tracinda Corp., would like to buy up to 12 million more shares of General Motors in spite of the slew of regulatory approvals it would take. Analysts say this is a ploy to get GM's board to push for an alliance with Renault and Nissan and to prop up the value of GM's stock.

"Tracinda continues to believe that a strong opportunity exists in a potential alliance between General Motors, Renault and Nissan and that there should be strong General Motors Board involvement in the analysis of such a potential alliance, including the utilization of independent advisors," Tracinda's filing with the Securities and Exchange Commission said.

GM Chairman and Chief Executive Rick Wagoner is in the midst of talks with Carlos Ghosn, head of Renault SA of France and Nissan Motor Co. of Japan, to discuss a possible alliance between the two companies.

Forbes reports that the talks are stalling due to GM's wish to be compensated for its role in the alliance because, as the world's biggest automaker, it believes it brings more to the table than Nissan and Renault. But Ghosn is flatly refusing to pay into the alliance.

"If you start [talking about] compensation even before you've discussed the synergies, it's nonsense," Ghosn said. "If you reward them for standing still, it kills the spirit of the alliance."

Analysts speculate that Kerkorian, fearful of talks failing, is trying to boost his standing with General Motor's board and the stock price.

"Kirk is putting more pressure on management to get the board . . . involved with these three-way talks," says David Feinman, who runs Havens Advisors hedge fund, to Marketwatch.

"I think he's playing defense," Gerald Meyers, a former chairman of American Motors Corp. tells The Associated Press. "These faltering negotiations are not good for the stock, and he's trying to prop it up."

Kerkorian owns 56 million shares, or 9.9 percent of GM's common stock, which were bought at an average of $30 a share, according to the AP and Marketwatch. GM's stock is currently trading around $33 a share, putting Kerkorian's holdings in profit territory.

Editor's Note:

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4. Jobless Claims Fall by 6,000

New claims for U.S. jobless aid fell by a slightly more-than-expected 6,000 last week, Labor Department data showed on Thursday, and remained at levels suggesting a stable jobs market.

First-time claims for state unemployment insurance benefits declined to a seasonally adjusted 316,000 in the week that ended Sept 23, compared with an upwardly revised 322,000 the prior week.

Analysts polled by Reuters had expected 315,000 new claims last week, after an initially reported 318,000 the week before. New claims have remained in a narrow range for much of the year, indicating the layoff pace has steadied.

The four-week moving average of new claims, which irons out volatile weekly data to provide a better picture of underlying labor market trends, nudged down 500 last week to 315,500.

The number of people who continued to collect jobless benefits after drawing an initial week of aid declined by 8,000 to 2.444 million in the week that ended

Sept 16, the latest for which figures are available. The fall compared with a forecast for 2.485 million continued claims.

Financial markets will look closely at the claims data for signs of labor market tightness ahead of September's payroll report, due on Oct. 6.

Analysts polled by Reuters forecast 123,000 new jobs were created last month, compared with 128,000 in August, while they see the unemployment rate unchanged at 4.7 percent.

The Federal Reserve is also monitoring labor markets closely as it ponders inflation pressures and whether it can afford to keep interest rates steady.

The Fed held rates at 5.25 percent at its meeting on Sept. 20, after halting a

2-year rate hike campaign in August.

Editor's Note:

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Editor's Notes:

Sidestep a slumping economy. Discover how to invest in sectors the smart way. Go here now.
Inflation is even higher than the government reports. To read more about the government's manipulation of inflation data, check out our report, "The Inflation Lie." Go here now.
Forget GM. Sir John Templeton is recommending the next company that will surpass GM as the world's leading automaker. He predicts major profits ahead. Learn More.
Three steps to success! Discover how you can multiply your profits and cut risk down to size in three easy steps. Go here now.
The nation's drinking water contains more than 2,100 toxic chemicals that can cause cancer, yet the EPA has established enforceable safety standards for only 87. Protect your health now.