Forecasting the Fed

Will the Fed cut rates at its January meeting? There is reason to think so.

Yesterday, we analyzed new data about a decline in manufacturing last month–and today, we’re bringing it into focus along with the rest of the foggy economic factors.

• Yes, manufacturing dropped. But it’s important to remember yesterday’s news came from a private source–the Institute for Supply Management–and the government tends to favor its own data much more. And, luckily, there is some fresh government information, released today, that said new orders for manufactured goods increased unexpectedly in November, which bodes well for the economy.

• We’re not sure yet how employment is faring. The Labor Department jobs data is due out Friday and is likely to heavily influence the Fed. Jobs and consumer spending are codependent factors; less employment, after all, means less money. Yet findings this week from payroll company Automatic Data Processing–showing the economy added 40,000 private sector jobs in December–indicate the jobs data may not be so bad.

• But housing is still weak. The U.S. is still waiting to hit rock bottom, which one might think we’d done because the Commerce Department said on Friday that new home sales hit their lowest point in 12 years in December.

However, signs exist the slump will be ongoing through mid-2008 at least, such as U.S. mortgage applications hitting their lowest level in 2007 in December, according to the Washington-based Mortgage Bankers Association.

• And don’t forget holiday consumer spending. Last week, the National Retail Federation seemed unimpressed with the early holiday season returns; however, online sales grew by 19 percent from last year, The Washington Times reported Wednesday, with a boost on Dec. 26 as shoppers took advantage of post-Christmas sales. Yet that still wasn’t enough to save the season–the NRF has predicted sales will likely increase by the smallest margin in five years.

A drop in consumer spending could indicate the economy is slowing down more than expected–which is why the always-bustling holiday season has been watched so carefully. Although we’re still waiting for the final results, it does look like spending is finally feeling the sting of the country’s money woes.

There is, of course, no way to predict with certain accuracy what the Fed will do. It spent the first half of last year being fairly fickle about rate cuts; but once they started, the Fed seemed to catch on to the idea.

And yet, it has been historically concerned about inflation–which currently poses a real threat. That said, Americans’ homes being worth less means less money for them to use, and since spending looks like it dropped over Christmas, it would seem that sad reality is beginning to sink in.

Which would make a rate cut–even with decent national job gains and a slight increase in production of goods–a strong possibility. We’ll see what the other economic data set to be released this month reveals. And we’ll be watching on Jan. 29.