Vital Signs: More Gloomy Forecasts from the Fed?

On tap: January consumer price index, housing starts, and leading indicator data, Federal Reserve economic projections and minutes

How bad is the economy going to get, and what does that mean for monetary policy? Those are two hot questions among economists right now. In his Feb. 14 testimony before the Senate Committee on Banking, Housing and Urban Affairs, Federal Reserve Chairman Ben Bernanke stated that “the outlook for the economy has worsened in recent months, and the downside risks to growth have increased.”

Observers deciphered this and other remarks as affirming current expectations for more interest rate cuts. But there remains a lot of uncertainty about how far and fast the Fed cuts rates.

That outlook may come into better focus when the Fed releases its updated Summary of Economic Projections on Feb. 20. The numbers, updated on a quarterly basis, will be released along with the central bank’s minutes to the Jan. 29-30 monetary policy meeting and the unscheduled session that led to the Jan. 21 surprise rate cut of 75 basis points.

The most important figures right now will be the 2008 forecasts for economic growth and unemployment. Economists want to see by how much the growth projections for gross domestic product change from the prior range of 1.8% to 2.5%, which was a downgrade from June’s 2.5% to 2.75%. On the employment front, the Fed officials in November expected a jobless rate of 4.8% to 4.9% by the end of 2008, up from 4.75% in June.

The projections also cover inflation. The upward trend in prices has taken a back seat to economic growth concerns and credit market turmoil. However, it is not out of the picture. That was demonstrated once again at the last monetary policy meeting when Federal Reserve Bank of Dallas President Richard Fisher voted against lowering the fed funds target rate by 50 basis points to 3%. It was the third time in this recent stretch of five rate cuts that a voting member on the Federal Open Market Committee objected to cutting interest rates.

That’s why January and subsequent consumer price index data are still important to watch. Some Fed officials are likely to remain nervous about cutting rates further and the implications that could have on price pressures later if inflation outside of food and energy keep rising at an annual pace above 2%.

The degree of change in the projections will offer insight into the central bank’s thinking. What’s more, the numbers will provide concrete information upon which economists and investors can revise their interest rate forecasts.

The markets will be closed Monday, Feb. 18 for the Presidents' Day holiday. Here’s the weekly economic roundup, from Action Economics.

Economic Reports
Report Date Time For Median Estimate Last Period
CPI Wednesday, Feb. 20 8:30 a.m. January 0.3% 0.3%
CPI (ex-food & energy) Wednesday, Feb. 20 8:30 a.m. January 0.2% 0.2%
Housing Starts (million, annual rate) Wednesday, Feb. 20 10:00 a.m. January 1.01 1.01
Philadelphia Fed Survey Thursday, Feb. 21 10:00 a.m. February -11.5 -20.9
Leading Indicators Thursday, Feb. 21 10:00 a.m. January -0.1% -0.2%


Tuesday, Feb. 19, 9 a.m. EST - Federal Reserve Bank of Minneapolis President Gary Stern speaks on the U.S. economy to the Financial Planning Association of Minnesota in Golden Valley, Minn.

ICSC-UBS STORE SALES - Tuesday, Feb. 19, 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 Feb. 16. During the week ended Feb. 9, sales posted a 0.7% retreat, following a big 1.7% gain in the prior week. Weekly sales have been alternating up and down on a weekly basis so far this year. On a yearly basis, sales still managed to grow 1.8% compared to a 1.6% increase for the week of Feb. 2.

JOHNSON REDBOOK INDEX - Tuesday, Feb. 19, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the second fiscal week of February, ending Feb. 16. For the first week ended Feb. 9, sales were off 1.2% compared to the same period in January. For the entire month of January, sales were down 0.4% compared to December. The early February decline is not a troubing sign for consumer spending.

HOME BUILDERS SURVEY - Tuesday, Feb. 19, 1:00 p.m. EST

The National Association of Home Builders and Wells Fargo bank will update its Housing Market Index (HMI). The February figures will shed some light on whether the housing market is nearing a trough. The index measures housing market conditions by surveying builders’ on current sales, buyer traffic through model homes, and expectations for sales during the next six months. In January, the overall reading edged up to 19, from 18 in December.

There was no change in the current home sales reading as it stayed at 19 for a second straight period. The index of expected home sales in the next six months ticked up to 28, from 26 in December. And the number of prospective buyers appeared to improve slightly, with a January reading of 14 from 13 the month before. Any improvement in buyer interest and actual sales would be another positive move for builders, who are trying to pare down inventories.


Wednesday, Feb. 20, 1:30 p.m. EST - Federal Reserve Bank of St. Louis President William Poole discusses inflation at Truman State University in Kirksville, Mo.

MORTGAGE APPLICATIONS - Wednesday, Feb. 20, 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 Feb. 15. The seasonally adjusted purchase index edged down 0.3% in the week ended Feb. 8 to 403.9 from 405.3. Meanwhile, the refi index fell 3% to 4901.5.

A further increase in mortgage rates was likely responsible for the small weekly declines. In the latest week, the rate for a 30-year fixed-rate mortgage was 5.72%, up from 5.61% for the week of Feb. 1.

The latest four-week moving averages for the purchase index dipped to 402.8 from 417.1. The refi index surged to 4809.3 from 4477.8 in the week ended Feb. 1.

CONSUMER PRICE INDEX - Wednesday, Feb. 20, 8:30 a.m. EST

Consumer prices are expected to post another modest increase. In December, the monthly rise was 0.3%, after an energy driven 0.8% surge in November. Besides the 0.9% gain in energy prices, rents grew 0.4%, and education costs grew 0.5%. Meanwhile, food prices were flat after 0.3% monthly gains in both November and October. Outside of food and energy, the increase in December was 0.2% after a 0.3% increase in November.

The yearly pace of overall inflation remained elevated. The December gain was 4.1% compared to the same period a year ago, vs. 4.3% in November, a 17-month high.

In the second half of 2007, core inflation has picked up, with monthly increases of 0.2% or more. As a result, the yearly pace of prices outside of food and energy costs is now 2.4%, a nine-month high. After slowing down in the first half of last year, price pressures have picked up.

The current level of inflation is elevated when compared to the Federal Reserves preferred range for inflation. This has the central bank paying serious attention to prices even as it cuts interest rates to address weaker economic conditions and the credit crisis. Indeed, Federal Reserve Bank of Dallas President Richard Fisher voted against the Jan. 30 rate cut.

NEW RESIDENTIAL CONSTRUCTION - Wednesday, Feb. 20, 8:30 a.m. EST

Home builders are intensely reining in new projects. In January, housing starts probably hung around an annual pace of 1 million units.

Starts are down by more than 55% from the peak at the start of 2006. More restraint may still be needed as demand is still fading. Sales of new single-family homes dropped 4.7% in December and are down 40.7% from a year ago. Inventories of unsold homes still cover nearly 10 months worth of sales. Overall, starts are off 38.2%, and those for single-family homes are down 36%.

If there is some good news, it’s that the builders may be close to catching up with the drop in sales. The difference between the seasonally adjusted annual rate in single-family home sales and starts has narrowed to less than 200,000 in December. Starts haven’t tracked this close to sales since the early 1980s.

With some more belt-tightening and a further slowdown in the quantity of newly finished homes hitting the market, home builders may soon be able to work off inventories at a faster clip. Once that happens, conditions should begin to stabilize for builders.

REAL EARNINGS - Wednesday, Feb. 20, 8:30 a.m. EST

Inflation-adjusted weekly earnings of production workers probably dropped in January. That’s based on the consensus forecast of a 0.3% gain in consumer prices and a 0.1% decline in average weekly earnings for the same month.

Real earnings edged up 0.1% in December, after declines of 0.5% and 0.2% in November and October, respectively.

The inflation-adjusted earnings are contracting on a yearly basis and the declines are getting bigger. The December drop was 0.9%, compared to 0.8% the month before and 0.4% in October. The latest data is a real concern for the economy. If inflation-adjusted earnings decline, then the purchasing power of consumers deteriorates, posing a serious threat to consumer spending growth this year.

FOMC MINUTES - Wednesday, Feb. 20, 2 p.m. EDT

The Federal Reserve will release the minutes for the Jan. 29-30 Federal Open Market Committee meeting as well as the unscheduled Jan. 21 session, when the central bank announced a 75 basis-point cut in the fed funds target rate. Economists will be paying close attention to the Fed’s economic projections that will accompany the notes. These forecasts come out quarterly and released with the minutes. Economists want to see how much growth forecasts have been downgraded since the November report.

In addition, they will be looking at inflation estimates to get a feel for how the Fed perceives inflation as an issue. Even though economic growth has weakened, prices outside of food and energy remain elevated and the central bank continues to stress that it will keep a close watch on inflation. Where inflation goes from here could have some impact on how quickly the latest round of easing is taken back when the economy shows signs of improving. That could be a second-half story for 2008, as many economists see gross domestic product growing at a better clip as early as the third quarter.

JOBLESS CLAIMS - Thursday, Feb. 21, 8:30 a.m. EST

In a sign that the labor market may not be falling off a cliff as analysts had feared during the past couple weeks, initial jobless claims fell to 348,000 in the week ended Feb. 9. It was a second straight decline after a surprise jump to 378,000 for the period ended Jan. 26. That prior surge and reported monthly decline in January payrolls touched off another bout of jitters over the job market.

This economic indicator is an extremely timely and accurate thermometer of the labor market. In times of severe economic slowdown or recession, there is typically a sudden swell of people filing claims. Investors caught by surprise over the Jan. 26 figures feared that was the first sign of such a jump. However, the subsequent declines in weekly claims are a reassuring sign.

Other weekly unemployment insurance data included the four-week moving average of initial claims, which rose to 347,250 from 335,250 in the week ended Feb. 2. Continuing claims eased to 2.76 million, from 2.77 million in the week ended Jan. 26. These numbers run a week behind the initial claims.

PHILADELPHIA FED SURVEY - Thursday, Feb. 21, 10 a.m. EST

Economists believe manufacturing activity kept contracting during February within the Philadelphia Federal Reserve Bank region. In January, the reading for general business conditions tanked to a level of -20.9, from -1.6 in December. It was the first back-to-back monthly readings below zero since the spring of 2003.

The sharp deterioration in the overall index was driven in part by a worsening demand picture. Respondents reported a decline in new orders with a reading of -15.2 in January, a six-year low. Measures of shipments and employment also ended up in negative territory.

Looking at the next six months, respondents were a little less optimistic in December. The future general activity index fell to 5.2 in December, from 11.1 in December, and levels near above 35 in the third quarter. However, expectations for new orders eased some but were still positive. The January reading was 9.5 in January from 11.6 in December. The shipments and employment indexes actually edged higher, although there were signs of caution in the capital spending gauges. While current the economic situation looks tenuous, it appears the region’s manufacturers still hold out hope that conditions will bounce back relatively quickly.

LEADING INDICATORS - Thursday, Feb. 21, 10 a.m. EST

The Conference Board’s index of leading economic indicators is likely to post a fourth straight monthly decline. The December index fell 0.2%, after two straight 0.5% drops in November and October. Compared to a year ago, the index is off 1.8%. The last time the index was down so much on a yearly basis was late in 2001.

According to the Conference Board, the ongoing declines in the index indicates economic growth will be sluggish in coming months. When the index falls more than 1% over a six-month period and half of the components post declines, the economy is headed for a recession. The overall index has declined 1.2% in the past six months. And there's deterioration across several of the individual indicators.

Looking toward the January report, stock prices did tumble and lead the index lower. At the same, the average weekly tally of initial claims for January was down compared to December, which is a positive. And consumer expectations also improved a little last month as well.

Earnings Calendar
Day Companies
Monday Genuine Parts, Hewlett-Packard, Integrys Energy Group, Medco Health Solutions, Medtronic, OfficeMax, Wal-Mart Stores, Whole Foods Market
Tuesday Analog Devices, Host Hotels & Resorts, Terex, TJX, Transocean, Watson Pharmaceuticals
Wednesday Chesapeake Energy, CMS Energy, Intuit, JC Penney, Newmont Mining, Quest Diagnostics, Safeway, Williams
Thursday PG&E