This is why Ben Bernanke wanted to wait.
U.S. retail sales were robust in July, jumping 0.8 per cent from the previous month, as all 10 subcategories posted gains, led by furniture and electronics.
It's too early to make definitive statements, but the backdrop for the third quarter is suddenly a little brighter. The July data that's been published to date is all positive. The increase in retail sales ended a streak of three consecutive monthly declines. Employers added 163,000 jobs, the most since February. First-time jobless claims fell through July and into the early days of August. Stock markets have been higher for several weeks.
In testimony before Congress last month, Mr. Bernanke, the chairman of the Federal Reserve, said policy makers were trying to assess whether the U.S. economy was running out of gas or simply stuck in the mud. The early July data suggests the latter. Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York, said Tuesday that the stronger-than-expected retail sales suggest third-quarter growth is tracking an annual rate of 1.7 per cent.
That would be little changed from the moderate pace of growth set in the second quarter, but it shows the U.S. economy far from a recession. The economy still is growing too slowly to substantially boost hiring, so the Fed may well deploy new stimulus measures when it next meets in September.
But the response could be measured, rather than an all-out assault in the form of a new quantitative easing program, where the central bank creates money to buy bonds. An economy that is safely treading water requires less help than one that is drowning.
"While this is certainly far from healthy growth, it is also clearly not recessionary either," Ms. Meyer said in a note. "Today's retail sales data further reduces the likelihood of QE3 in September, but does not take it off the table."
Several Wall Street analysts raised their forecasts for inflation adjusted consumer spending to an annual rate of 2 per cent in the third quarter, a big increase from the previous quarter, when spending was almost non-existent. Another couple of months of back-to-school shopping are the reason for hope. Consumers account for some 70 per cent of U.S. gross domestic product, so a return to the malls could offset the drag of weaker demand for exports.
That could buy Mr. Bernanke some more time. With evidence that the economy has stabilized, policy makers could opt for a less dramatic stimulus measure, such as lengthening their conditional commitment to keep interest rates near zero. The reason to proceed cautiously is because there is no way to know how Congress will resolve the "fiscal cliff," the combination of tax increases and spending cuts that are scheduled take effect in 2013.
Everyone agrees that this is a blow the U.S. economy can ill afford. (The fiscal measures set for next year equal 5.1 per cent of GDP, according to Toronto-Dominion Bank.) But with the presidential election so close, there is little expectation that any resolution will be found before November's election.
That means the Fed is attempting to set policy while facing a significant blind spot.
Certainty about U.S. tax policy and a decision to ease up on short-term austerity would provide a bigger boost to the economy than lowering interest rates that already are at record-low levels. Yet failure by politicians to address the fiscal cliff would demand a forceful response by the Fed to try to contain the damage.
As long as the economy shows that it can stay afloat, Mr. Bernanke will be tempted to wait for a clearer idea of what politicians will do before courting further controversy with a third round of QE.