As we had predicted, the Fed passed up on a rate increase at the October 3 FOMC meeting. Presidential politics was a clear reason to avoid making any statements. Nevertheless the recent signs of some slowing in the economy could postpone another rate hike until December or January 2001.

The revised second quarter GDP figures help to pin point the slowing trend in the economy. While GDP expanded by 5.8 percent, personal consumption on durable goods fell by 5.0 percent, non-durable goods consumption also showed a moderate slowdown to 3.8 percent. Investment in residential construction slowed noticeably during the past year. Consumers have apparently been pinched by the increases in interest rates. Interestingly consumer sentiment remains euphoric. While the index has slipped modestly since June, it is still at the same level as more than a year ago.

Another interest rate sensitive sector, business fixed investment, continues to expand at a very brisk pace. During the second quarter it was up 11.2 percent. Apparently businesses are not shy about expanding capacity.

One of the risks in the outlook is oil prices. In September, West Texas Intermediate had peaked at $33.88 per barrel. If prices do not come down soon, it will add greater pressures to the inflation pipeline. At the same time, high gasoline prices is likely to cool off demand for large gas guzzling vehicles such as SUVs.

The consumer price index (CPI) fell in August 0.1 percent, due to the fall in oil prices in July. However, in view of the surge in oil prices during August and September, we expect the CPI to post higher than normal inflation rates during September and October. Strong productivity growth has so far been a big relief.

                Potential Risks in the Horizon:

Consumer savings and debt have reached worrisome proportions. So far the interest rate increases have failed to cause any panic; but this situation needs to be monitored closely. The personal savings rate fell to a negative 0.4 percent rate in August, It had never fallen below 3 percent during the 1990s, and the normal rate is about 6 percent. The debt service burden continues to rise, reaching 7.64 percent in the first quarter of this year.

The U.S. trade deficit continues to bulge. In July the trade deficit was $31.89 billion. We continue to expect the current account deficit to reach an unsustainable 4.2 percent of GDP this year. This could be bad news for the US dollar.

With Latin America firmly on track to achieve strong economic growth this year of about 3.8 percent, political developments are taking center stage. Of particular concern is the surprising resignation of Peruvian president Alberto Fujimori. He is set to leave office in July of next year following the elections for a new President in March. However, confusion still exists about the transition details.

The surprising resignation of Peruvian president Alberto Fujimori has sent shock waves around the region. His demise was trigger by a video that shows his right-hand man Vladimiro Montesinos bribing a senator.

The resignation of Argentina’s vicepresident, Carlos Alvarez was not a surprise. Alvarez had been at odds with president de la Rua for a long time. The corruption scandal involving several senators, was just the last straw. Alvarez’s resignation puts in jeopardy the coalition that swept de la Rua to the presidency last year. A small political party, the Social Democratic Party, has already abandoned the coalition. All these developments come at a time when pressures on the government to reactivate the stagnant economy are mounting.

Municipal elections in Brazil have been largely favorable to president Cardoso’s governing coalition. However, the center-left Workers Party, known by its portuguese initials PT, has scored key victories in important cities.

Bolivia has been racked by strikes and street demonstrations in protest against energy and fuel price increases and against the extensive eradication of coca crops.