Experts Talk FOMC Minutes, Factory Orders, Productivity

By BusinessWeek staff

The Federal Reserve's policy-setting arm, the Federal Open Market Committee, released the minutes from its Aug. 11-12 meeting on Sept. 2. Wall Street also eyed reports about private-sector employment in August, durable goods orders for July, and fourth-quarter productivity.

BusinessWeek staff compiled reactions from Wall Street economists on the FOMC minutes, economic data, and other topics on Sept. 2:

Action Economics

The FOMC debated the trajectory of the economy at the Aug. 11-12 policy meeting, as well as its liquidity measures. Indeed, there was considerable uncertainty on the strength of the rebound. While policymakers were more confident that the downturn was ending, and expected the economy would recover slowly over the second half of the year, most also believed the economy was still vulnerable to adverse shocks. Meanwhile, a few FOMC members saw the potential for "substantial" disinflation, though most continued to anticipate a subdued inflation rate over the next few years.

The FOMC did discuss trimming [its purchases of mortgage-backed securities and agency debt], but in the end decided to keep the liquidity intact as it had more time to decide since the programs would not be ending until yearend. But it did decide to gradually slow the pace of [the Fed's] Treasury purchases through October.

David Wyss, Standard & Poor's

New orders placed with U.S. manufacturers rose 1.3% in July, their fifth increase in the past six months. The rise was less than the 2.3% expected by the market, however, as nondurable orders fell 1.9%, largely because of a price-caused drop of 7.9% at petroleum refineries. Durable orders were revised slightly higher, to 5.1% from the 4.9% reported last week. Factory shipments were unchanged in July after a 1.8% June increase.

Since the decline in nondurable orders (and shipments) was so concentrated in petroleum and related industries, the news is still positive for the manufacturing sector.

Productivity in the nonfarm business sector rose at an annual rate of 6.6% in the second quarter, revised from the 6.4% reported a month ago. The market had expected no revision. Output was revised to a 1.5% drop from the 1.7% reported previously. Productivity is up 1.9% from a year ago, compared with 1.0% in the first quarter but in line with the 1.8% rise in 2008. Unit labor costs plunged at a 5.9% annual rate, but are down only 1.2% from a year earlier.

The data are often volatile quarter-to-quarter, and a four-quarter change is a better way of looking at them. The surprise is that productivity has not dropped in this recession as it normally does.

Edward McKelvey, Goldman Sachs

At a time when U.S. households seem intent on raising their saving rates, the historical record of disposable income in early recovery cautions against a robust forecast, at least for consumer spending. Disposable income has usually risen less rapidly than GDP during the first year of cyclical expansion. Only in the past two cycles, when government support provided a deep cushion, did it outperform. This pattern reflects a systematic tendency for labor income to lose ground in early recovery as companies do not have to bid aggressively for workers in a weakened labor market. Meanwhile, nonlabor income—mainly interest and dividends—tends to underperform as interest rates hit cyclical lows and dividend cuts lag declines in corporate profits.

We see no reason for these patterns to change, either for labor or nonlabor income. And while a declining share of disposable income has not prevented strong recoveries in the past, this is due mainly to a pattern of robust hiring in the labor market, which looks quite unlikely this time around. Meanwhile, the scope for additional government support seems limited given the help that has already been given via tax cuts and benefit extensions.

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