Archive for January, 2008

Fed Cuts Rates By Half Point

Kurt Brouwer January 30th, 2008

The Federal Reserve has been playing a cat and mouse game with the financial markets for the past few months. There is a valid question as to which one is the cat and which one the mouse, but the game goes on nonetheless. Today, the Fed cut interest rates by 50 basis points or one half of one percent. This follows the 75 basis point cut on January 22nd (see Federal Reserve Cuts Interest Rates Again).

This piece from the Wall Street Journal gives some details on this latest move [emphasis added]:

Fed Cuts Rates By Half Point (Wall Street Journal, January 30, 2020, Greg Ip)

‘With its second rate cut in nine days the Federal Reserve continued one of its most aggressive monetary easing campaigns in recent history as it seeks to nip an incipient recession in the bud.

The Fed lowered its short-term interest rate target 0.5 percentage points to 3%, and left the door open to more: the statement accompanying the move said “downside risks to growth remain” and the Fed would “act in a timely manner as needed to address those risks.” Investors expect the Fed to cut the rate to 2.75% in March. (Read the full statement)

But even as the Fed moves swiftly to stop a financial and housing crunch from crippling the entire economy, it has to keep an eye on the opposite risk: of overdoing it.

Markets see the Fed funds rate falling as low as 2.25% by year-end. While the Fed said it is prepared to ease further, its statement also reminded the public of how much it has already done. “Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity,” it said. That suggests that unless the outlook or markets deteriorate unexpectedly, rates may be close to, if not already at, the bottom.

“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the Fed said. Echoing last Tuesday’s statement, it said, “Recent information indicates a deepening of the housing contraction as well as some softening in labor markets.”

The Feds said it “expects inflation to moderate in coming quarters” but would “monitor inflation developments carefully.”…’

I like this move by the Fed because it is clearcut, bold and consistent with previous statements by Fed Chairman Ben Bernanke. Unlike the previous proprietor of the Fed, Bernanke’s statements are understandable. And, I believe clarity and predictability are good things when it comes to the world’s leading central bank. Based on what he has said and done, I have a sense of what concerns him the most right now — and that would be deflation.

One other point is that — as seen on these pages — PIMCO and Bill Gross were right again when they called for a 3% Fed Fund rate (see PIMCO & Bill Gross Call For 3% Fed Funds Rate). However, I think even they have been surprised at the speed with which the Fed cut rates.


U.S. Economy Grows Very Slowly

Kurt Brouwer January 30th, 2008

The Commerce Department announced its preliminary numbers for economic growth in the fourth quarter and they were very slow — on par with the first quarter of 2007.

U.S. Economy: Growth Slows As Housing, Spending Cool (Bloomberg, January 30, 2020, Shobhana Chandra)

‘The U.S. economy teetered on the edge of a recession in the fourth quarter as home construction fell the most in 26 years and Americans cut back on spending.

Gross domestic product increased at an annual rate of 0.6 percent, down from 4.9 percent in the prior three months, the Commerce Department said today in Washington. The pace of growth was half that forecast in a Bloomberg News survey and the slowest since the first quarter of last year…

We all knew fourth quarter economic growth would be very slow, however this number — 0.6% — is slower than I expected. The ironic part is that this a book-end year. We had a very slow first quarter with growth of 0.6% and a very slow fourth quarter, but the second and third quarters were very strong 3.9% and 4.9% respectively. The article continues:

“The economy is still growing, but it’s not growing fast enough,” said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina. “The Federal Reserve is going to go half a point today.”

The economy was forecast to expand at a 1.2 percent pace, according to the median estimate of economists. In addition to the slump in housing, the economy was hobbled by a drop in inventories, which may reflect concern over the outlook for consumer spending.

For all of 2007, the economy expanded 2.2 percent, the least in five years, to $11.6 trillion after adjusting for inflation.

“We’re not happy with the number,” Commerce Secretary Carlos Gutierrez said in an interview with Bloomberg Television after the report. “We need a booster shot before the economy gets sick,” he added, referring to a stimulus package lawmakers are considering in Congress…’

As we go further into the New Year, it will be fascinating to see how this plays out. So far, this isn’t a recession, just slow growth. The housing industry is clearly in a severe slump and though the worst may be behind us, housing will not contribute much to growth in 2008. The key will be to see how business spending and investment go as well as how we do on job growth.

Durable Goods Orders Up 5.2% In December

Kurt Brouwer January 29th, 2008

This report from the U.S. Census Bureau is good news. Although it is only one data point, it points to a reasonably good economic environment rather than a surefire recession as many have predicted [emphasis added]:

Highlights From The Advance Report On Manufacturers’ Shipments, Inventories, and Orders (U.S. Census Bureau, January 28, 2020)

New orders for manufactured durable goods in December increased $11.2 billion or 5.2 percent to $226.6 billion, the U.S. Census Bureau announced today. This was the second consecutive monthly increase and followed 0.5 percent November increase. Excluding transportation, new orders increased 2.6 percent. Excluding defense, new orders increased 2.9 percent.

Shipments of manufactured durable goods in December, down four of the last five months, decreased $0.1 billion or 0.1 percent to $212.6 billion. This followed a 0.2 percent November decrease.
Unfilled orders for manufactured durable goods in December, up thirty-one of the last thirty-two months, increased $20.0 billion or 2.5 percent to $808.6 billion. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 1.2 percent November increase.

Inventories of manufactured durable goods in December, up five of the last six months, increased $3.5 billion or 1.1 percent to $320.7 billion. This was also at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 0.8 percent November increase.

The fact that new orders for durable goods are up sharply is very good news. The fact that inventories of such goods are up to a very high level is not so good. So, the news is mixed, but unless this increase in durable goods orders is just a blip, the certainty of a recession seems diminished. We’ll see.

$17.4 Trillion In Retirement Accounts

Kurt Brouwer January 29th, 2008

Last year we did a post on what Americans had cumulatively put away for retirement. That number was for year-end 2006 (see $16.4 Trillion in Retirement Accounts). Now, the Investment Company Institute has updated the number through June, 2007 and it represents a healthy increase from the previous number.

The ICI reports that American savings for retirement totaled $17.4 billion as of June 30, 2020, which is a healthy 6% increase in six months. They gather this information by adding up the total of annuities, government pension plans, private industry pension plans, profit sharing plans, 401(k)s, 403(b)s, 457 plans and IRA accounts. This total now represents 39% of all household assets.

As dramatic as the number is — $17.4 trillion — it does not tell the whole story because it only includes tax-deferred retirement accounts such as employer-sponsored retirement plans, IRAs etc. It does not include assets in taxable savings accounts, investment accounts or other accounts that Americans also might tap for retirement. Not to mention home equity, ownership of a business and so on. This is a good number to retain the next time you are reading a story (here and here) about the ‘fact’ that Americans are not saving anything.

The Economy Is Stronger Than You Think

Kurt Brouwer January 28th, 2008

Every day, we read or hear dire reports of economic armageddon. But facts are stubborn things and this article by Brian Wesbury is full of pertinent facts. I do disagree with him on one point, but we’ll get into that later. Wesbury points out that, despite all the gloom and doom, the economy is still chugging along and a recession is unlikely [emphasis added]:

The Economy Is Fine (Really) (Wall Street Journal, January 28, 2020, Brian Wesbury)

‘It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble…’

One of the few points on which I disagree with Wesbury is his first comment. I can remember a time — just after the Crash of 1987 — when the hysteria was even stronger than it is today (see The Stock Market Crash of 1987). Wesbury continues:

‘…True, retail sales fell 0.4% in December and fourth-quarter real GDP probably grew at only a 1.5% annual rate

…Yet many believe that a recession has already begun because credit markets have seized up. This pessimistic view argues that losses from the subprime arena are the tip of the iceberg. An economic downturn, combined with a weakened financial system, will result in a perfect storm for the multi-trillion dollar derivatives market. It is feared that cascading problems with inter-connected counterparty risk, swaps and excessive leverage will cause the entire “house of cards,” otherwise known as the U.S. financial system, to collapse. At a minimum, they fear credit will contract, causing a major economic slowdown…

Many commentators express concern about the condition of U.S. banks. They believe banks are in deep trouble and this will yield a domino effect as banks cut back and then their borrowers have to contract their businesses. Yet, as I wrote, facts are stubborn things. Major U.S. banks actually made money last year despite all the bad loan writeoffs (see Despite Writeoffs, Major Banks Made Money In 2007). So, widespread bank failures are very unlikely. And, with the Federal Reserve acting to cut interest rates and the U.S. Treasury devising ways to help homeowners with bad loans, it is likely that mortgage losses will be contained. Wesbury continues:

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