Experts Talk FOMC Meeting, Industrial Production
Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Mar. 15.
Joseph LaVorgna, Deutsche Bank
[Federal Reserve policymakers] meet for a one-day Federal Open Market Committee meeting [on Mar. 16], and we do not expect any substantial changes to the statement at this point. Monetary policymakers have cited "low rates of resource utilization" along with muted inflation pressures as a justification for "exceptionally low levels of the federal funds rate for an extended period." The "extended period" phraseology has appeared continuously in the official FOMC meeting statements since March of last year—prior to this, policymakers were noting that exceptionally low rates would likely be warranted for "some time." We believe the Fed will remove this language at some point in the first half of 2010, although just not yet, since labor market data have not strengthened sufficiently. If the economy improves along the profile we are forecasting, we believe the Fed will remove "extended period" at the Apr. 28 FOMC meeting.
Based on what we are seeing in terms of continuing claims and what we are projecting for nonfarm payrolls, the labor market could soon surprise investors and policymakers with excessive strength.
Sal Guatieri, BMO Capital Markets
Despite an improving economy, the Fed is unlikely to end its longstanding pledge to hold rates exceptionally low for an "extended period," given continued job losses, wobbly housing numbers, and subdued inflation. However, Kansas City Fed President [Thomas] Hoenig will likely oppose retaining this commitment, and it will be noteworthy if another member dissents too.
Meantime, the FOMC will probably decide to wrap up its $1.25 trillion MBS purchase program at the end of March and agree to wind down the plethora of liquidity-enhancing programs put in place during the credit crisis. The discount rate could be raised again. The members will further discuss reserve-draining measures, such as reverse repos and term deposits, in preparation for an eventual policy tightening later this year.
David Resler, Nomura Securities
The index of industrial production rose 0.1% month-over-month in February as inclement winter weather slowed manufacturing activity (Consensus: 0.0%). Manufacturing production fell 0.2%, with weakness concentrated in motor vehicle and parts-related production. Non-vehicle manufacturing production rose 0.1%.
Absent the weather-related distortions, we believe total manufacturing production would have shown another strong gain this month (survey-based data, for instance, still point to solid growth). Mining output increased 2.0%, and utilities output increased 0.5% (the latter slightly less than we anticipated, given cold temperatures).
By product group, output of business equipment (particularly high-tech goods) remained healthy, rising 0.4% month-over-month. Steady gains in business equipment production confirm the strong recovery in U.S. capital spending. In contrast, consumer goods output declined 0.4% after increasing 0.9% in January. Again, however, we entirely attribute this setback to poor weather rather than fundamental weakness in the economy. The capacity utilization rate inched up to 72.7%, from 72.5% previously.
Nicholas Tenev, Barclays Capital
The Empire State manufacturing index slipped to 22.86 in March, from 24.91, slightly above consensus expectations and roughly in line with our estimate of 23.0. The component indices, which do not contribute directly to the headline activity index, showed uniform improvement. The new orders index jumped to 25.43, from 8.78, indicating that demand in the area is rising at a faster pace. The shipments index rose to 25.58 in March, from 15.14 in February, and the employment index improved to 12.35, from 5.56, the highest since October 2007. The unfilled orders index rose to 4.94, from 2.78, the workweek index moved higher, to 12.35 from 8.33, and the index of supplier delivery times increased to 2.47, from -6.94, indicating a slower pace of deliveries that is often associated with faster future production.
On the inflation front, the index of prices paid slipped to 29.63, from 31.94, while prices received rose to 8.64, from 4.17, indicating an improvement in manufacturers' margins.
We view this as an encouraging report overall, with the headline index remaining strong and components all pointing to improvement in the sector.