Will central banks rescue U.S., European economies?
Trader William McInerney (center) works on the floor of the New York Stock Exchange on Tuesday. Stocks ended slightly lower Tuesday as investors held back ahead of three critical events this week: policy meetings at both the Federal Reserve and the European Central Bank and a closely watched report on jobs in the U.S.
The Federal Reserve wraps up its two-day policy meeting today. Chairman Ben Bernanke has pledged to act if unemployment stays high. The European Central Bank meets Thursday -- a week after ECB President Mario Draghi vowed to "do whatever it takes" to save the European common currency, the euro.
"If the ECB comes through and follows up with what Mr. Draghi said a couple of days ago, that's big," says Nariman Behravesh, chief economist at IHS. "That would minimize the risk of a nasty scenario."
Investors are hoping the Fed and ECB will announce plans to flood markets with cash through large-scale bond purchases. But economists caution that the hopes might be dashed. The Fed might not be in a hurry to act. And investors might be expecting more of Draghi than he can deliver.
Economies on both sides of the Atlantic need help. Unemployment in the 17 countries that use the euro remained at a record 11.2 percent in June, the European Union reported Tuesday. The International Monetary Fund expects the eurozone economy to shrink 0.3 percent this year.
The U.S. government announced last week that the American economy grew at a listless 1.5 percent annual pace from April through June, even slower than the 2 percent rate in the first three months of the year. On Friday, the Labor Department will reveal just how bad the American job market is. Economists expect the unemployment rate remained at 8.2 percent for the third straight month in July and that the economy generated just 100,000 jobs, not enough to keep pace with population growth. The first three months of 2012 job growth averaged more than 225,000 a month.
Still, many economists say the U.S. economy isn't yet weak enough to push the Fed to act now. Some good news dribbled in Tuesday: The Conference Board said consumer confidence rose in July for the first time in five months. The Commerce Department said Americans' incomes grew in June at the fastest pace in three months. And the Standard & Poor's/Case-Shiller home index showed that home prices rose in May from April in every city the index tracks.
Economists say it's more likely the U.S. central bank will wait until its next meeting Sept. 12-13 if they're going to do something. One option, eagerly awaited by financial markets, is a third round of bond purchases designed to push down long-term interest rates, a policy known as "quantitative easing" or QE3. Diane Swonk, chief economist at Mesirow Financial, predicts that the Fed "will stimulate further, but probably not pull the trigger on QE3 until September."
Economists worry that Fed action won't make much difference anyway: Long-term rates are already at historic lows but haven't done much to spur consumer spending.
Consumer spending flat: The Commerce Department reported Tuesday that consumers spent no more in June than they did in May -- bad news for an economy that relies on consumer spending for 70 percent of output.
Incomes, savings rise: But Americans' incomes and savings rose in June, possibly laying the groundwork for more spending and perhaps stronger economic growth in coming months. "Overall, this is good news for the future, but it provides little help to the U.S. economy right now," Eugenio Aleman, senior economist at Wells Fargo Securities, said. "Consumers may be able to unload these savings if conditions improve during the holiday season."
Home prices increase: Home prices and consumer confidence also ticked up in reports released Tuesday. The Standard & Poor's/Case-Shiller home price index released Tuesday showed increases in all of the 20 cities tracked. And a measure of national prices rose 2.2 percent from April to May, the second increase after seven months of flat or declining readings.
Phoenix, one of the cities hit hardest by the housing slump, posted the strongest year-over-year gain in home prices. Still, prices there remain more than 50 percent below their peak, reached in summer 2006.
Consumer confidence rises: The Conference Board said Tuesday that its Consumer Confidence Index increased to 65.9, from 62.7 in June, the first increase in five months. That's the highest reading since April and better than the reading of 62 that economists had expected.