March 19 (Bloomberg) -- Federal Reserve Bank of New York President William C. Dudley said signs the economy is improving don’t dispel “meaningful” risks to growth, including higher gasoline prices, fiscal cutbacks and a weak housing market.
“The incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established,” Dudley said today in a speech in Melville, New York. “But, while these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery.”
Dudley and his colleagues on the Federal Open Market Committee are weighing whether the stimulus that helped fuel the best six-month streak of job growth since 2006 is sufficient for meeting the Fed’s goal of full employment. Dudley is FOMC vice chairman.
Joblessness has fallen to 8.3 percent, the lowest in three years, and the FOMC last week upgraded its assessment of the economy while holding to its plan to keep the benchmark interest rate close to zero through at least late 2014.
“Real economic activity has yet to be strong enough on a sustained basis to make a big dent in the overall amount of slack in the U.S. economy,” Dudley, 59, said before the Long Island Association, an organization of business groups, unions, nonprofits and government agencies representing Nassau and Suffolk counties, which have each declared fiscal emergencies. They were his first public comments since the FOMC met on March 13.
“While it is true that growth was stronger in the fourth quarter, most of that growth was due to inventory accumulation,” and “historically, a quarter in which inventory investment makes a significant growth contribution is typically followed by a quarter in which that growth contribution is modest or even negative,” Dudley said. “That appears to be what is shaping up for the first quarter of this year.”
Dudley also said that though the “unusually mild weather” recently in the U.S. has curbed demand for heating, it “temporarily boosts economic activity overall,” leading to “higher-than-normal levels of construction activity.”
Stocks rallied last week and Treasuries tumbled as reports showing growth in manufacturing in the northeast and a drop in jobless claims bolstered confidence in the world’s largest economy.
The Standard & Poor’s 500 Index climbed 2.4 percent in five days to 1,404.17 on March 16, the highest since May 2008.
Ten-year Treasury yields climbed to 2.3 percent from 2.03 percent a week earlier, pushed up in part by concerns the Fed may hold bank on additional stimulus because of its improved outlook for the economy. The yield on the 10-year Treasury note fell today two basis points to 2.27 at 8:59 a.m. in New York.
Claims for jobless benefits dropped the week before last to match a four-year low, Labor Department figures showed March 15. Applications for unemployment insurance payments fell by 14,000 to 351,000 in the period ended March 10.
“It is important to recognize that about half of” the decline in the unemployment rate since September “was due to a declining labor force participation rate,” Dudley said. “Had the labor force participation rate not declined from around 66 percent in mid-2008 to under 64 percent in February, the unemployment rate would still be over 10 percent.”
Inflation concerns also contributed to the rise in Treasury yields last week after a government report showed that consumer prices increased in February by the most in 10 months, with gasoline accounting for 80 percent of the upward move.
The consumer-price index climbed 0.4 percent in February, matching the median forecast of economists surveyed by Bloomberg, after increasing 0.2 percent the prior month, according to government figures. The so-called core measure, which excludes more volatile food and energy costs, advanced 0.1 percent, less than projected.
Consumer prices increased 2.9 percent in the 12 months ended in February, the same as in January. The Fed aims for an inflation rate of 2 percent.
Inflation will probably “moderate further” this year despite the increase in gasoline prices, and said that inflation expectations “remain well anchored,” Dudley said.
“While the underlying core inflation rate, that strips out volatile food and energy prices, has been somewhat higher than expected a few months back, it appears that the annual rate of core inflation has peaked and we expect it to begin to decline later this year,” Dudley said.
Unemployment will “decline gradually” toward Fed goals and the inflation outlook is “subdued,” the FOMC said in a statement after a March 13 meeting. Policy makers said they expect “moderate economic growth,” compared with a prediction of a “modest” expansion after their January meeting.
The Fed has kept its benchmark rate near zero since December 2008, and in January extended a previous pledge to keep rates low through mid-2013. It has also bought $2.3 trillion of bonds in two rounds of so-called quantitative easing to hold down borrowing costs.
“We cannot lose sight of the fact that the economy still faces significant headwinds and there are some meaningful downside risks,” Dudley said.
Confidence among U.S. consumers unexpectedly dropped in March as this year’s jump in gasoline prices threatens to squeeze household budgets. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 74.3, the lowest this year, from 75.3 the prior month. The gauge was projected to rise to 76, according to the median forecast of 70 economists surveyed by Bloomberg News.
Life Time Fitness Inc., which operates 95 fitness centers, is seeing “pressure” in enrollment fees as consumers still struggle to recover from the worst recession since the Great Depression, Michael Robinson, chief financial officer of the Chanhassen, Minnesota-based company said last week at UBS AG’s Global Consumer Conference.
“We made a decision back in early 2009 that we don’t expect a consumer to rebound back to the vibrant levels that we were seeing back in 2005 and 2006 and 2007,” Robinson said.
“There has been some improvement in the economy, but we still see a very discerning member or a very discerning customer trying to decide whether to be a member or not,” he said.