Both the housing market and consumer spending are cooling off, reflecting the dual impact of rising interest rates and rising energy prices. But the current downshifting in the U.S. economy shouldn't adversely affect manufacturing, said Martin Regalia, senior vice president and chief economist for the Chamber of Commerce.
However, long-term, currency issues with China and other trading partners need to be addressed to create a more even playing field for U.S. companies, Regalia said.
``The economy is fundamentally sound, but it is clear that the U.S. economy is downshifting and at a more rapid pace than we anticipated just a few months ago,'' said Regalia at a June 28 news briefing in Washington. ``But housing is not a bubble that has burst, and the decline is not enough to adversely impact the economy.''
He said he expects gross domestic product to remain slightly under 3 percent for ``about a year or so,'' before beginning to accelerate in mid-2007.
Regalia is particularly bullish on the manufacturing sector, as ``corporate profits are strong, companies are cash-rich and they have retained a lot of earnings,'' which he said allows them to internally finance equipment and software acquisitions - both of which are expanding at good rates. ``The business community is confident about the underpinnings of the U.S economy,'' he said, and, with inventories at rock-bottom levels, demand is driving growth.
He also said he expects the Federal Reserve - which raised the federal funds rates by one quarter of a percentage point to 5.25 percent June 29 - to raise rates again in October before possibly holding rates steady or moving them downward again.
Despite his overall optimism, Regalia did sound an alarm on trade issues, warning that if behind-the-scenes negotiations do not allow currencies to reach their true market levels, the U.S. government will need to resort to ``more draconian measures'' to fix things.
Regalia said he expects the trade deficit ``to bottom out and then make improvements over the course of a year.'' But he said the current $2.5 billion imbalance in asset ownership that exists today needs to be corrected. According to Regalia, foreign companies own $11.5 trillion in U.S. assets, compared with the $9 trillion in foreign assets that U.S. companies own.
``That is untenable in the long-run for both the U.S and other countries,'' he said.
The chamber chief economist, a former fiscal analyst for the Congressional Budget Office and an economist for the Federal Reserve's Board of Governors, also praised Federal Reserve Chairman Ben Bernanke for his policy, but chastised him for a series of remarks that have ``spooked the market,'' triggering several downward movements in stock prices.
``If we graded him on what he's done'' since he took over as Fed chairman Feb. 1, ``he'd be a B+ or an A-,'' said Regalia. ``But if we graded him on what he said, he'd be a C- or a D,'' because his contradictory remarks on inflation and interest rates ``have caused unnecessary confusion for the market.''
``The economy is being punished for statements'' by Bernanke that inflation is ``above his long-term comfort level'' and then intimating that the Fed might curb interest rate hikes, said Regalia. ``He is talking way too much and says one thing one day and something entirely different the next week. He is triggering tremendous uncertainty,'' said Regalia, even suggesting that the Fed chairman ``should give us all time to catch up [with his thoughts] before he makes more statements.''
``People are uncertain where he is going because his comments are inconsistent. I don't think his policy of addressing issues in public has helped. Every time he says something, the market immediately runs and sells off stocks.''
Regalia also called for newly confirmed Treasury Dept. Secretary Henry M. Paulson - the former chairman and chief executive officer of investment bank Goldman Sachs - to be ``a major economic communicator for the Bush administration.''
``We have a good economy, either B+ or A-, but it hasn't been sold well'' to the American public, Regalia said. ``We have had only five quarters of outright negative growth in the past 20 years.''