Vital Signs: Investors Want More Cuts from the Fed

On tap: Federal Reserve discusses monetary policy, January employment, consumer confidence and new home sales figures, December personal spending

What's next for the Federal Reserve? The surprise move on Jan. 22, when the central bank slashed the federal funds target rate to 3.5% from 4.25%, hasn't quenched the financial markets' thirst for interest rate relief. Instead, most investors still believe Chairman Ben Bernanke and the Federal Open Market Committee (FOMC) will end their monetary policy meeting on Jan. 30 by announcing another 50 basis-point cut in rates.

Along with the Jan. 22 rate cut, the Fed stated that "incoming information indicates a deepening of the housing contraction as well as some softening in labor markets." Meanwhile, the bank expects inflation to moderate, although it will keep a close eye on the numbers. Along with the timing of the rate cut, this more downbeat assessment raised fears about the health of the economy.

Bracketing the Fed monetary meeting on Jan. 29-30 are several pieces of economic data that will help shape perceptions on whether the labor markets, housing, and the rest of the economy are truly getting sicker.

Before Chairman Bernanke ends the monetary policy meeting, the Fed will have fresh data on new home sales, durable goods orders, consumer confidence, and economic growth for the fourth quarter of 2007. In addition, Automated Data Processing will release its National Employment Report, a measure of nonfarm private employment using anonymous payroll data. Combined, these numbers will show the strength of the economy as it exited 2007, and how businesses and consumers are responding early on in 2008.

After the meeting, the Bureau of Labor Statistics will release its January employment data. Ultimately, this report could be more important than the Fed meeting. Another weak report along the lines of the December’s decline in private nonfarm payrolls and jump in the jobless rate would send the financial markets into panic that a recession is close at hand. Conversely, if the the retreat in January weekly jobless claims are followed by a solid rebound in hiring, investors and Fed officials alike may let out a small sigh of relief.

Amid all the economic data will come another slew of earnings figures. Overall, it will play out to be a very critical week in understanding the health of the U.S. economy.

Here is the weekly economic calendar, Action Economics.

Economic Reports
Report Date Time For Median Estimate Last Period
New Home Sales (million, annual rate) Monday, Jan. 28 10:00 a.m. December 0.65 0.65
Durable Goods Orders Tuesday, Jan. 29 8:30 a.m. December 0.8% -0.1%
Consumer Confidence Tuesday, Jan. 29 10:00 a.m. January 88.0 88.6
Gross Domestic Product (advance) Wednesday, Jan. 30 8:30 a.m. Q4 1.2% 4.9%
Employment Cost Index Thursday, Jan. 31 8:30 a.m. Q4 0.8% 0.8%
Personal Income Thursday, Jan. 31 8:30 a.m. December 0.4% 0.4%
Personal Consumption Expenditures Thursday, Jan. 31 8:30 a.m. December 0.2% 1.1%
Chicago PMI Thursday, Jan. 31 9:45 a.m. January 52.8 56.4
Nonfarm Payrolls (thousands) Friday, Feb. 1 8:30 a.m. January 50 18
Manufacturing Payrolls (thousands) Friday, Feb. 1 8:30 a.m. January -15 -31
Unemployment Rate Friday, Feb. 1 8:30 a.m. January 5.0% 5.0%
Average Hourly Earnings Friday, Feb. 1 8:30 a.m. January 0.3% 0.4%
Hours Worked Friday, Feb. 1 8:30 a.m. January 33.8 33.8
ISM (manufacturing) Friday, Feb. 1 10:00 a.m. January 47.5 47.7
Construction Spending Friday, Feb. 1 10:00 a.m. December -0.4% 0.1%
University of Michigan Consumer Sentiment Index (final) Friday, Feb. 1 10:00 a.m. January 79.0 80.5

NEW RESIDENTIAL SALES - Tuesday, Jan. 29, 10 a.m. EST

Home sales are expected to hold steady in January after a big drop in December. During the final month of 2007, sales came in at an annual rate of 647,000, from 711,000 in November, a 9% drop. It was the weakest monthly result since April of 1995. And on a yearly basis, sales are off a dramatic 34.4%, the biggest year-over-year decline since 1991.

The recent numbers could actually be worse. The Census Bureau report does not include buyers backing out of deals, which are still occurring frequently. The figures show that the housing market is not turning the corner yet and housing may keep contracting through 2008.

Even though sales fell in December, the number of unsold homes for sale did tick down to 505,000, the smallest level of inventories since November of 2005. That shows that builders are making some progress in pulling back on new construction to get supplies in line with demand.

However, with the number of unsold homes still large enough to cover more than nine months of sales at the December level, there is still a lot more work to be done on the part of builders. Construction needs to be ratcheted back even further and sales prices will need to be lowered.

ICSC-UBS STORE SALES - Tuesday, Jan. 29, 7:45 a.m. EST

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will present sales results for the week ended Jan. 26. A weak holiday sales season is stretching into the new year. For the week ended Jan. 19, sales did bounce up 0.7%, after a 0.9% drop in the week of Dec. 12, and a 0.4% during the prior week.

On a yearly basis, store sales grew 1.6%, up from a very weak 1.1% rise in the week ended Jan. 12, but below the 1.9% rise in the week of Jan. 5 and 2.3% for the prior period.

JOHNSON REDBOOK INDEX - Tuesday, Jan. 29, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the third fiscal week of January, ending Jan. 26. In the first two fiscal weeks of January, sales were down 0.2% compared to the same period in December. For the full month, December spending retreated 0.7%. The latest numbers reveal some post-holiday weakening in consumer spending.

DURABLE GOODS ORDERS - Tuesday, Jan. 29, 8:30 a.m. EST

Economists are forecasting a rebound in durable goods orders for December. The consensus a month ago was that orders would bounce back strongly in November, but the report showed a 0.1% fall. In fact, orders have declined for four straight months.

There has been a lot of volatility among some key industries. Computer orders rebounded in November, with a 24.9% increase following a 23.2% plunge the month before. Construction machinery showed a similar pattern, while industrial machinery dropped in November after a big gain in October. Meanwhile, the volatile civilian aircraft category zoomed up 20.8% in November following a tepid 0.3% rise in October. And orders for housing related goods such as furniture and appliances remain weak.

The volatile dives and gains are netting out to an overall weakening in the industrial sector. Durable goods orders are off 0.5% from a year ago. And the key measure of capital goods orders excluding defense equipment and the highly volatile civilian aircraft category is off 2% from last November. This reading is often called core capital goods orders and is viewed by economists as a reliable gauge of business investment.

Other manufacturing related data since the last durable goods report have also been softer. A national survey of factory activity indicated falling output in December, while the Federal Reserve’s December industrial production report was flat.


The S&P/Case Shiller Home Price Indices measures changes in home prices on a monthly basis in 20 major metropolitan areas. Price changes are tracked by using repeat sales data. When a house is resold, the latest sales price is paired up to the amount from the prior purchase.

The October home price index for a group of 20 cities plunged a record 1.4%, after a 0.8% fall the month before. In addition, all 20 cities posted monthly drops for a second consecutive period.

The longer running composite index of 10 cities also posted a 1.4% monthly decline, also a record for an index that stretches back to 1987.

On a monthly basis, the cities posting the biggest drops occurred in San Diego, Detroit, Las Vegas and Phoenix. Except for Detroit, these cities also saw the huge price gains during the housing boom.

On a yearly basis, the 20 city composite index was off 6.1% and the 10-city index was off 6.7%, both record declines. Even in cities where prices are still rising, such as Seattle, Charlotte, and Portland, the gains are rapidly slowing. In September, the yearly price change for Dallas turned negative. The widening scope of the housing recession will put more pressure on consumer spending and economic growth during 2008.


Tuesday, Jan. 29, 10 a.m. EST

Consumer confidence probably eroded after a surprise uptick in December. The unexpected rise in the final month of 2007 may have been linked to gasoline prices, which eased a little after climbing in November.

However, there was a troubling decline in the current conditions reading, which dropped to 108.3, from 115.7 in November, and 118 in October. The expectations index actually posted a decent gain to 75.5, from a 57-month low of 69.1. The perception that jobs are hard to get hit a two-year high, while the share of respondents that believed business conditions are bad hit a four-year high. Yet there was a less pessimism about business conditions and employment six months from now.

After the slew of poor economic and financial data that have come out since the December survey, these views may weaken along with the headline result.


Wednesday, Jan. 30, Midnight EST - Former Federal Reserve Board Chairman Alan Greenspan gives a speech entitled “Shifting Paradigms in a Global Economy” at an investment forum in Moscow.

9 a.m. EST - The Federal Reserve’s Federal Open Market Committee will discuss monetary policy over its two-day meeting. An announcement by the Fed will come around 2:15 p.m. There is a widespread view among economists and investors that the central bank will cut its target fed funds even further.

On Jan. 22, the Fed made a surprise inter-meeting move, cutting interest rates by 75 basis points to 3.5%. The accompanying press release stated the move came “in view of a weakening of the economic outlook and increasing downside risks to growth.” In particular, Chairman Ben Bernanke and other FOMC members are concerned about the ongoing contraction in housing and evidence of a weakening labor market. In December, the unemployment rate jumped to 5%, from 4.7%.

Right now, options trading in federal funds futures, which can offer a reading on what the market expects the Fed’s rate will be, implies a 100% likelihood that policymakers will cut rates at the Jan. 29-30 meeting. The key question now is how big the rate cut will be. Right now, most investors believe it will be 50 basis points, bringing the fed funds rate down to 3%.

MORTGAGE APPLICATIONS - Wednesday, Jan. 30, 7 a.m. EST

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending Jan. 18. Falling interest rates are sparking a surge in refi applications.

The interest rate for 30-year fixed-rate mortgages fell to a two-year low of 5.49% from 5.62% the week before.

The seasonally adjusted purchase index eased 4.6% to 439.9 from 461.2 in the week ended Jan. 11. Refinancing activity climbed 16.9% to 4178.2 from 3575.5.

The latest four-week moving averages moved up for both purchase and refi applications. The average for the purchase index was 419 from 407.6. The refi index soared to 2967.2 from 2401.5 in the week ended Jan. 11.

ADP NATIONAL EMPLOYMENT REPORT - Wednesday, Jan. 30, 8:15 a.m. EST

The ADP National Employment Report is a measure of nonfarm private employment using anonymous payroll data of close to 400,000 businesses. The monthly figures are prepared by Macroeconomic Advisers, an economic consulting firm. The report is used by economists to get a sense of how the labor markets are doing before the Bureau of Labor Statistics’ employment report.

The ADP numbers for December were soft, with private employment reported to have increased by 40,000 workers. It was the smallest monthly gain since June of 2003. The November tally was revised down to a gain of 173,000 jobs, from the originally reported 189,000. And the six-month average cooled off to 77,000 new jobs per month, from 143,000 in January of 2007. Based on the BLS figures, the six-month average rise in private service-sector payrolls is 110,000, from 166,000 in January.

GROSS DOMESTIC PRODUCT - Wednesday, Jan. 30, 8:30 a.m. EST

Economic growth cooled off sharply in the fourth quarter. The consensus is that real gross domestic product grew at an annual pace of 1.2%, compared to 4.9% in the third quarter and 3.8% in the second quarter.

The ongoing housing recession should once again be a big drag. But spreading caution in corporate boardrooms means growth in capital spending probably cooled off a bit and inventories did not grow much. Consumer spending is not expected to match the solid 2.8% annual rate of growth in the third quarter, although it won’t be as bad as feared back in November when there were serious concerns about the holiday shopping season.

JOBLESS CLAIMS - Thursday, Jan. 31, 8:30 a.m. EST

The number of initial jobless claims slipped to 301,000 from 302,000 for the week ended Jan. 19. In the week ended Jan. 5 claims stood at 322,000. Holiday shortened weeks may be one factor for the recent retreat in claims. The upcoming numbers for January will be key in judging whether this is a temporary improvement or if labor market conditions aren’t quite as bad as feared.

The four-week moving average did drop to 314,750 in the week of Jan. 12 from 328,750. Continuing jobless claims, which are a week behind the initial claims figures, pulled back to 2.67, from 2.75 million in the week ended Jan. 5.


Personal income probably rose by a decent amount in December. The consensus view among economists is that wages, dividends, and other forms of income grew by a solid 0.4% for a second straight month. A key component of income to watch is wages and salaries, which make up over 50% of all personal income.

The apparent weakness in the labor market appears to already be causing slower wage growth. In November, the yearly gain in wages and salaries was 5.2%, vs. 6.3% in September. This pace is still relatively strong, and is above the pace of inflation. However, if the labor markets deteriorate further, wage growth should be expected to cool off and put some pressure on consumer spending in light of the ongoing housing recession and cost pressures from elevated food and energy prices.

Consumer spending has held up reasonably well so far as well. Various chain store and retail sales figures are looking poor, but data from the Bureau of Economic Analysis encompasses more areas of spending, including various services not covered in other reports. Spending is expected to post a lukewarm 0.2% monthly rise for December, after a 1.1% jump in November. The pattern may be the result of an early Thanksgiving which meant more holiday season shopping days in November.

The yearly pace of sales was a stout 6.7% in November. Even after adjusting for inflation, sales were growing at a solid 3% pace. Barring a far weaker than expected December result, fourth-quarter consumer spending should top an annualized pace of 2% growth, beating many economists’ expectations heading into the final period of 2007.

The Personal Consumption Expenditures (PCE) price indexes, which are the preferred inflation gauges of the Federal Reserve, also come out in this report. The latest interest rate cuts show the Fed has put economic growth concerns above inflation.

However, the latest numbers through November show that price pressures haven’t abated just yet. Overall inflation rose 0.6% in November on higher energy costs. The yearly pace picked up to 3.6%, and it appears that price gains in the fourth quarter are gaining steam relative to the third quarter.

Excluding food and energy, prices rose 0.2% in November and 2.2% from a year ago. That puts inflation back above the Fed’s comfort level of 1.5% to 2%. So far in the fourth-quarter, it looks as if core inflation is also picked up some momentum. The Fed believes it must act to help the economy, and expects the slowdown in real activity and the a higher jobless rate will reduce price pressures.

EMPLOYMENT COST INDEX - Thursday, Jan. 31, 8:30 a.m. EDT

The Labor Dept.’s fourth-quarter employment cost index -- a measure of wages, salaries, and benefits paid by businesses -- is expected to match the third-quarter gain of 0.8%. In the second quarter, costs grew 0.9%. On a yearly basis, the third quarter increase was 3.3% for a second straight period after a 3.5% yearly increase in the first quarter.

Two trends emerge when splitting total compensation into wages and benefits. Wage growth has been holding up well. On a yearly basis, wages and salaries among civilian workers were up 3.3% from a year ago in the third quarter. In the past five quarters, the yearly gains have topped 3% after a long stretch of sub-3% growth.

Conversely, increases in benefit expenses have been cooling off, coming in at a yearly clip of 3.2% by the third quarter. That’s a considerable slowdown from the 7.1% pace in early 2004. Businesses appear to be focusing on controlling health care and other benefit costs. However, a tighter labor market has led employers to give some ground on wages in order to attract qualified workers. The trend in wage growth could break down if the labor market weakens further.


The Chicago-area National Association of Purchasing issues its January Business Barometer report. The report is expected to show a deceleration in activity after a surprising jump to 56.6% in December, from 52.9% in November. The October reading of 49.7% indicated a very slight decline in activity. Economists don’t expect such a reading for January, but other regional and national surveys of manufacturers do point to some possible downside risk.

Among the other December indexes, orders picked up with a reading of 58.4%, from 53.9% in November. Production growth eased, while the backlog of unfilled orders surged and inventories contracted at a quicker pace. These numbers paint a pretty healthy picture for the region’s manufacturers, but it does contrast with many other reports covering the manufacturing sector.

HELP-WANTED INDEX - Thursday, Jan. 31, 10 a.m. EST

The Conference Board releases it December index of help-wanted ads. The index keeps sliding, falling to 21 in November, from 22 the month before, 24 in September, and 29 a year ago. Once again, help-wanted advertising declined in all nine regions of the country.

According to Conference Board economist Ken Goldstein, online advertising figures also indicate reduced job recruitment efforts. Online advertised vacancies were off 6% in December vs. a year ago, the smallest annual increase since this series began in May 2005. These figures are not seasonally adjusted, making the yearly comparison the more reliable measure of activity. The number of advertised vacancies online for every 100 persons in the labor force slipped again, to 2.3, from 2.64 in October, and 2.19 a year ago.

VEHICLE SALES - Friday, Feb. 1

Auto makers announce January light vehicle sales results. In December, sales came in at 16.2 million units, virtually unchanged from November, but off nearly 3% from a year ago. In 2007, total sales slipped 2.5% to 16.1 million units on weaker economic conditions and surging energy prices. According to Global Insight, 2008 sales are forecast to slow to 15.6 million vehicles, a 3.5% drop from 2007.

EMPLOYMENT REPORT - Friday, Feb. 1, 8:30 a.m. EST

Hiring in January is expected to be a little better than December. Nonfarm payrolls edged up by just 18,000 workers in the final month of 2007, but that was driven by government hiring. There's one piece of data that offers some hope of a better-than-expected January report. Initial jobless claims retreated during the month after steadily rising in December.

In December, private employment fell by 13,000 workers, with construction and manufacturing employers cutting 75,000 positions. Private service-sector payrolls grew by 93,000 workers, with most of the gains coming in professional and business services, health care, and leisure and hospitality. Another sign of potential fraying in the economy was the decline in retail jobs as well as drops in ground transportation and virtually no change in other transportation areas. Transportation is an area to watch, as continued declines may indicate less demand to haul goods and weaker economic activity.

In recent months, the weaker pace of hiring has not been strong enough to keep the jobless rate from rising. In December, the unemployment rate touched 5% for the first time since November of 2005. The 0.3% point increase from 4.7% was the biggest in over six years. If hiring in January comes in as expected, the unemployment rate could tick up a little higher -- although economists expect it to stay at 5%.

Another upshot from a weaker job market is slower wage growth. With less demand for workers and a larger pool of unemployed persons, the need to raise wages diminishes. In December, the yearly pace of average hourly earnings slipped to 3.7% from 4.3% in December of 2006. For January, economists are forecasting a mild 0.3% gain. On an annualized basis, the expected January gain is in line with the current yearly pace of growth.

Besides the fresh January figures, the Bureau of Labor Statistics will release revised nonfarm payroll employment, hours, and earnings figures for the 12-month period through March of 2007. The revisions could cast a different light on how tight the job market was before economic conditions deteriorated.

ISM SURVEY - Friday, Feb. 1, 10 a.m. EST

Factory activity kept contracting in January, according to economists surveyed by Action Economics. In December, the purchasing managers’ index plunged to 47.7%, from 50.8% in November. A reading below 50% is associated with a decline in factory output.

In reality, factory activity doesn’t typically fall on a yearly basis until the PMI slips to levels just above 47%. No matter, the retreat in December was disconcerting to economists and investors, slightly raising the odds of an economic recession in the first half of 2008.

Among the components, both new orders and production flipped from showing small gains in November to declines during December. Both indexes fell to six-year lows in December. Another worrisome result was the index tracking export orders, which fell to 52.5%, from 58.5% in November. The sharp slowdown raises concerns that economies abroad are also starting to cool, resulting in weaker export growth.

CONSUMER SENTIMENT INDEX - Friday, Feb. 1, 10 a.m. EST

The University of Michigan and Reuters issues the final January reading of consumer sentiment. The final results are expected to show some backsliding from the initially reported results. The preliminary January reading was 80.5, up from 75.5 in December and 76.1 in November. People expressed more optimism about both current conditions and future expectations. Perhaps more heartening was a jump in the index tracking respondents’ views on buying durable goods. It climbed to a six month high of 154.

Some of the gain may be attributable to easing gasoline prices in December, after an upswing in November. To that point, respondents felt a little better about their personal finances and were a little more hopeful about the upcoming 12 months. Views on the economy were also less pessimistic.

However, tumbling stock prices, mounting concerns of a U.S. recession, and the unexpected Jan. 22 rate cut by the Fed could spook consumers and lead to a complete reversal in the early January gains.

CONSTRUCTION SPENDING - Friday, Feb. 1, 10 a.m. EST

Construction spending probably fell in December, and the numbers may show the weakness is spreading beyond housing. There are rumblings that commercial real estate is losing its luster and concerns about economic growth could begin to crimp growth in other commercial categories. In November, total outlays were up 0.1%. Once again, private residential construction fell 2.5%, while private non-residential spending climbed 1.7%, and public building grew 2.5%.

There are increasing concerns that the ongoing credit crisis will crimp funding for some commercial projects and cool off what has been a very impressive run in non-residential building. This is an important trend to watch. Since the start of 2006, nonresidential construction has, on average, contributed 0.4% point to inflation adjusted economic growth each quarter.

Earnings Calendar
Day Companies
Monday American Express, Ashland, Black & Decker, Corning, FPL Group, Halliburton, McDonald's, Plum Creek Timber, Rohm & Haas, SanDisk, Stanley Works, SYSCO, Tyson Foods, Unum Group, Verizon Communications
Tuesday 3M, Allstate, American Electric Power, Avery Dennison, Bemis, Boston Properties, Burlington Northern Santa Fe, Cardinal Health, Centex, CH Robinson Worldwide, Chubb, Consol Energy, Convergys, Countrywide Financial, Dow Chemical, Eli Lilly, EMC, Entergy, Hercules, Lexmark International, Occidental Petroleum, Paccar, Pepsi Bottling Group, Robert Half International, Sherwin-Williams, Smith International, T Rowe Price Group, Trane, Travelers, Unisys, United States Steel, Valero Energy, Yahoo!, Zimmer Holdings
Wednesday Aflac, Allergan, Altria Group,, Baker Hughes, Boeing, Constellation Energy, Dominion Resources, Dover, Eastman Kodak, Estee Lauder, Hess, Illinois Tool Works, International Flavors & Fragrances, Kellogg, Kraft Foods, Legg Mason, Merck, Murphy Oil, NiSource, Novellus Systems, Pinnacle West Capital, Pulte Homes, Sealed Air, Southern, Starbucks, United Parcel Service, Xcel Energy
Thursday Affiliated Computer Services, Anheuser-Busch, Bristol-Myers Squibb, Brunswick, CA, Celgene, Colgate-Palmolive, CR Bard, CVS Caremark, Electronic Arts, EW Scripps, Goodrich, Google, IMS Health, Integrys Energy Group, IntercontinentalExchange, L-3 Communications, Marathon Oil, Mattel, MBIA, McKesson, Millipore, Monster Worldwide, New York Times, Newell Rubbermaid, PPL, Procter & Gamble, Raytheon, Safeco, Snap-On, Starwood Hotels & Resorts Worldwide, Tesoro, VeriSign, Western Union, Wyeth
Friday Automatic Data Processing, Chevron, Cummins, Exxon Mobil, Gannett, MeadWestvaco, Public Service Enterprise Group, Ryder System, Simon Property Group
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