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US Economic Engine Splutters

The last quarter of 2009 was a good quarter for the US economy, which showed positive growth for the first time after several consecutive quarters of negative growth. But, the US economy's engine seems to have run out of steam in October, when growth seems to have missed the expectations mark. This seems to have given the US Fed further reason to keep interest rates low. The growth in US output was limited to a mere 0.1% in October due to a decrease in manufacturing for the first time after four months. However, producer prices rose 0.3% after dropping 0.3% in September. This could be interpreted as a positive indicator as a rise in producer prices indicates latent demand in the economy.

The increase in prices correlates to a fall in production in October, while the converse appears to be true for September, when output grew, but prices fell. At the same time, the Fed seems to be hopeful that high unemployment is likely to keep inflation under check as overall demand would be subdued. Thus, it hopes to keep monetary policy loose and interest rates low in order to turn the economy around.

Supporting the Fed was the core index, which represents changes in prices excluding food and fuel. The core index fell 0.6% in October, making this the biggest fall since July 2006. This figure provides more ammunition to the Fed to keep interest rates low as there seems to be no imminent threat of inflation.

Home and auto sales had been firm for the last few months, but not on their accord. The sales for both had received a booster due to the government programs of tax credits and the cash for clunkers plan. With, both these programs near their expiration, the home and auto sectors seem to be taking a hit.

Residential construction took a beating in October, with the homebuyer tax credits set to expire. This clearly suggests that the construction and home sales business at this point of time needs governmental support and was growing on the back of a government incentive. In line with the expected drop in demand for new homes, building permits fell to 552,000 in October from 575,000 in the month prior.

Mimicking, the trend was a sharp drop in mortgage applications, which fell to the lowest level since late 1997. With the cash for clunkers program having expired, automobile manufacturers also seem to have taken a step back. Production in the auto and auto parts segment declined by 1.7% in October after an increase of 8.1% in September.

US manufacturing has been growing since June this year on the back of increasing US exports to Asia and Europe, where demand has been firming up. US exports also received help from a weak US dollar, which lead to competitive pricing of US exports.

However, the news of weakness in the US economy seems to have led to some risk aversion again, which sent investors scurrying to take shelter in the US dollar. This led to a sudden spike in the US dollar, something that does not seem too well timed as it is likely to hurt US exports. However, the spike is likely to be short lived and appears to be due to investors booking profits from their risky assets and taking a breather before getting back to another round of investing.

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