Investment

» SteveT - ECRI Jan US Inflation Gauge Eases Again

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http://www.fxstreet.com/news/forex-news/...

Fri, Feb 2 2007, 14:40 GMT
http://www.djnewswires.com/eu

ECRI Jan US Inflation Gauge Eases Again

NEW YORK (Dow Jones)--An index designed to anticipate cyclical turning points in inflation decreased in January.

At the same time, a smoothed version of the annualized growth rate slipped further into negative territory in January to a negative reading of 2.8% from an upward-revised negative reading of 2.1% in December (previously reported as down 2.8%).

The Economic Cycle Research Institute said Friday that its Future Inflation Gauge decreased to 119.5 in January from an upward-revised 120.1 (previously reported at 119.6).

The gauge was pulled down in January mainly by disinflationary moves in measures of jobs, home loans, interest rates and vendor performance partly offset by an inflationary move in a measure of commodity prices.

"The U.S. future inflation gauge remains in a cyclical downswing that began in the fall of 2005," said Lakshman Achuthan, managing director at ECRI. "Thus, U.S. inflation pressures continue to ebb, even as economic growth prospects improve further."

Weekly updates of the index are released only to subscribers.

-By John McAuley, Dow Jones Newswires; 201-938-4425; john.mcauley@dowjones.com

(END) Dow Jones Newswires

-- posted by SteveT

» ECRI - RSS Feed Active for ECRI News

Hi All,

We've set up an RSS Feed to alert user of any updates on our "In the News" section of our website.

Thanks,
Lakshman

p.s. CNBC interview tomorrow at 3pm (ET) regarding Bernanke testimony.

-- posted by ECRI

» crossd - Kirk

..can't remember the thread i saw this on
but i believe you said only 2 other times in SP500 history did P/E compression go more than 3 or 4 years..

which were those other 2 times?

donc

-- posted by crossd

» ECRI - A Recession That Arrived on Cats’ Paws

A Recession That Arrived on Cats' Paws, by David Leonhardt

Feb. 28 (The New York Times) The nation's manufacturing sector managed to slip into a recession with almost nobody seeming to notice. Well, until yesterday.

Wall Street was caught off guard when the Commerce Department reported yesterday morning that orders for durable goods - big items like home computers and factory machines - plunged almost 8 percent last month. That's a big number, but it really shouldn't have come as too much of a surprise. In two of the last three months, the manufacturing sector has shrunk, according to surveys by the Institute for Supply Management that have been out for weeks.

But the new report seemed to focus investors' attention on the problems in manufacturing and became one more reason for people to sell stocks. By the time the market opened in New York, stocks in almost every industrialized country had already fallen sharply. The trouble began in Asia, where the Chinese stock market plummeted, before spreading to Europe and finally this country. The Standard & Poor's 500-stock index ended up with a loss of 3.4 percent, its fifth straight daily decline and its worst since 2003.

All of which raises a question that would have sounded strange even a month ago. Is the entire United States economy in danger of going the way of the manufacturing sector? Is it possible that we're headed for a real recession?

For months now, the economy seemed to shrug off the forces weighing on it and just kept on growing. But those forces never went away. If anything, a number of them have gotten stronger. And that's the most worrisome part of the bad news from the nation's factories: it fits into a larger story.

As stocks were dropping yesterday morning, an economist named Ian Shepherdson wrote one of his regular e-mail messages to clients: "Manuf is in recession; Fed please take note." Mr. Shepherdson, it's important to mention, is not one of Wall Street's perma-bears. When manufacturing last shrank, back in 2003, he correctly insisted that it was a false harbinger.

But this time, the manufacturing downturn stems from a couple of larger economic problems. One, of course, is the housing slump, which has caused a big drop in new construction and much less demand for doors, windows, countertops and a lot of other things that kept factories busy in recent years.

In recent weeks, the troubles in housing have spilled into the financial sector. Big lenders like NovaStar Financial are paying the price for extending credit to people who couldn't actually afford the homes they bought during the real estate boom. With many of those homeowners falling behind on their mortgage payments, lenders are making it tougher to get loans. That's a sensible, and overdue, move. But it will hurt economic growth in the months ahead.

The second big problem for manufacturers is the series of interest rate increases that the Federal Reserve has imposed since 2004. They may seem like old news, because the last of them came eight months ago, but it typically takes a year to a year and a half for a rate increase to have its full impact. A lot of the big decisions affected by interest rates, like whether to buy a new car or a new piece of factory equipment, aren't everyday decisions. Only now are some families and businesses starting to react to the higher rates.

The economic news certainly isn't all bad. The housing problems still haven't turned into a crisis, thanks in part to interest rates that are still not high by historical standards. So the most likely situation is not a full-blown recession (often defined as two consecutive quarters of a shrinking economy).

The forecasters at the Economic Cycle Research Institute in New York, who have accurately predicted each of the last three recessions, argue that the current slowdown won't amount to much more than a lull. By the middle of the year, they say, low interest rates and healthy corporate spending will have the economy growing nicely once again.

Lakshman Achuthan, the institute's managing director, told me yesterday that he thought the odds of a recession over the next year were less than 20 percent. Mr. Shepherdson - the chief United States economist at High Frequency Economics,, who's more bearish than most forecasters right now - still puts the odds at only 30 percent.

But for all the attention that formal recessions get on Wall Street, they are not really the benchmark that matters to most people. A significant slowdown that falls short of a recession can do a lot of damage to stock prices, profits and wages. Only in the last few months, for example, has the current expansion grown strong enough to give most American workers pay increases that outpace inflation. Those raises would be endangered if the economy were to slow from last year's growth rate of 3.4 percent to even 2 percent.

"This is going to get worse before it gets better," Mr. Shepherdson argues. "We're in danger of slipping into something very like a recession, if not necessarily hitting the technical definition. It would be big enough to hurt, that's for sure."

The main message of yesterday's worldwide stock sell-off - as well as the stealth manufacturing downturn - is that the economy is facing bigger risks than we imagined just a few weeks ago. In mid-February, Ben Bernanke, the Federal Reserve chairman, told members of Congress that he was worried about inflation taking off. The clear implication was that the Fed's next move might be to raise rates yet again to keep the economy from overheating.

Until yesterday, that seemed plausible. It doesn't this morning. Like stocks, the price of a futures contract tied to Fed policy shifted sharply yesterday. Before the day began, investors expected the Fed to hold its benchmark rate steady through the end of the summer. Now they are betting that the rate will be cut once before July and again by the end of the year. If that's all that is necessary to keep the economy healthy, it will be a relief.
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-- posted by ECRI

» ECRI - The Forecast for the Forecasters Is Dismal

The Forecast for the Forecasters Is Dismal, By DANIEL GROSS

Mar. 4 (The New York Times) LAST week, Alan Greenspan proved that a retired maestro can still seem to conduct the world's financial orchestra, even if he no longer occupies the podium.

On Monday, Mr. Greenspan, the former Federal Reserve chairman, said that "it is possible we can get a recession in the latter months of 2007." His musings, to a group of executives in Hong Kong, were followed over the next 48 hours by a break in the frothy Chinese market and poor numbers on United States home sales and durable-goods orders. Together, the events contributed to a swift downdraft in the United States stock market, and led to renewed concerns about the health of the long-running economic expansion.

By Thursday, Mr. Greenspan was backtracking. Noting that while a recession in 2007 is possible, he elaborated: "I don't think it's probable." But his comments - and the global reaction - raise a larger question: If a recession were imminent, would Mr. Greenspan, or any less august economist, be able to forecast it?

The answer, based on recent experience, is a resounding no. "I don't think we, as a profession, ever had an ability to forecast recessions," said Jeffrey A. Frankel, professor of economics at the Kennedy School of Government at Harvard and a member of the National Bureau of Economic Research's Business Cycle Dating Committee, the official arbiter of recessions. "It's hard enough to know when a recession has started, looking at it with hindsight."

Indeed. No disrespect to Mr. Greenspan, but neither he nor the similarly numerate members of his professional fraternity have a particularly good record of forecasting recessions. As Yoram K. Bauman, an economist who teaches at the University of Washington and performs stand-up comedy, summed up an often-used line: "Macroeconomists have successfully predicted nine of the last five recessions."

The Economist reported that in March 2001 - the month the last recession began - 95 percent of American economists believed that there wouldn't be a recession. In February 2001, the 35 professional forecasters surveyed by the Federal Reserve Bank of Philadelphia collectively predicted growth at an annual rate of 2.2 percent for the second quarter of 2001 and 3.3 percent for the third quarter. It's as if meteorologists stood outside as the storm clouds approached and informed television viewers that endless sunshine was ahead.

Economists offer several explanations as to why their fellow dismal scientists collectively make such lousy forecasters. Nouriel Roubini, professor of economics at the Stern School of Business at New York University, believes that there are institutional reasons. Many forecasters surveyed by the Philadelphia Fed work for Wall Street investment banks or asset management companies, which tend to argue that it is always a good time to invest. There are powerful incentives and pressures not to be unduly bearish about the economy. "When your firm is bullish on everything else, and is peddling all kinds of stocks and bonds, nobody will be foolish enough to go the other way," he said. Of course, Mr. Roubini is perfectly willing to go the other way. Last summer, he boldly predicted a recession for the first half of 2007.

Lakshman Achuthan, managing director at the Economic Cycle Research Institute, which accurately predicted the 2001 recession, says that most economists are simply using the wrong tools. "Generally speaking, professional forecasters tend to extrapolate from existing trends, albeit in a very sophisticated way," he said.

Doing so, however, inevitably causes them to miss out on inflection points - at the beginning or the end of recessions, he said. Mr. Achuthan thinks that the institute's methodology, which focuses on a series of leading indicators and avoids specific numerical forecasts about economic growth, allows it to gauge turning points more accurately.

The complexity, dynamism and diversity of the United States economy also make forecasting recessions difficult. In small countries, which may depend on a single export, like oil, or where a natural disaster can wreak catastrophic results for the entire economy, it is comparatively easy to determine when and how one of these factors can cause a contraction, Mr. Frankel of Harvard said. But in the United States, whose overall economy has responded so well in recent years to a series of external shocks - from 9/11 to Hurricane Katrina - it's rarely sufficient to focus on a single factor.

Christina Romer, professor of economics at the University of California, Berkeley, says economists can't predict recessions for the same reason stock market analysts can't accurately predict market crashes. "Both kinds of events, by their nature, are not predictable events," she said. Almost all the postwar recessions were preceded by a shock, like a spike in short-term interest rates, or a sharp rise in oil prices. "It's impossible to see the shocks coming," Ms. Romer said.

The very infrequency of recessions in the United States may make it more challenging to detect their imminent arrival. An entire generation of economists has grown up believing that the business cycle is largely something of the past, like black-and-white TV. Since March 1991, there has been only one recession, which lasted eight months. It's like asking people who spend their time in Alaska to start forecasting tropical storms.

AS a group, forecasters certainly don't see a recession coming. On Feb. 13, those of the Federal Reserve Bank of Philadelphia collectively raised their estimates for real gross domestic product growth for 2007 to 2.8 percent, from 2.6 percent.

But just because they've been wrong in the past doesn't mean forecasters are wrong now. "There is no reason at the moment why the steady momentum of the economy, with gains in employment feeding back into consumption growth, should falter," said Robert J. Gordon, professor of economics at Northwestern University and a member of Business Cycle Dating Committee at the National Bureau of Economic Research.

To one of the few people who accurately predicted the 2001 recession, the glass seems half full rather than half empty. "We actually see a diminishing risk for recession in 2007," Mr. Achuthan of the Economic Cycle Research Institute said. "Our leading indexes for the vast service sector have turned up in 2007. This economy is much bigger than the housing or the manufacturing sector."

-- posted by ECRI

» ECRI - Newsweek article

Which of these dueling stories will prevail-a good economy or a bad one? I'm voting for the better half. By Jane Bryant Quinn

March 12, 2007 issue (Newsweek) - Omigosh, what does it mean? are we in for it? A recession? Just when investments finally looked good again? How can anyone trust the market? "Frank, I told you to sell those stocks!"

Cool it, friends. I don't know whether prices will be up or down by the time you read this, but the long-term case for holding well-diversified stocks is always good. True, stocks have gone nowhere for seven long years, measured from the bubble peak. But even counting the bust, Standard & Poor's 500-stock index has averaged 7.5 percent a year over the past 10 years, with dividends reinvested. That's less than its long-term average of 11.5 percent but better than bonds, Morningstar reports, and better by far than bank accounts.

A slide like the one last week-down 3.5 percent in a single day-draws the doomsters out of their caves. I agree that there's plenty to growl about. Construction and manufacturing are in recession. Orders for durable goods-cars, furniture, machinery, laptops, household appliances-plunged almost 8 percent last month. Defaults are soaring on "subprime" and "alternative" mortgages made to higher-risk borrowers. Profit growth is slowing down. In the most recent quarter, home prices dropped at the fastest rate on record.

But that's only half the story. When you turn your eyes, you'll see strength in the service sector-entertainment, information technology, business and financial services, education, consulting, retail. Consumers have money to spend, thanks to low unemployment and a rise in real wages. Inflation is well in hand, for now. The Conference Board's Consumer Confidence Index stands at its highest level in five and a half years. In short, it's a bipolar moment. Which of these dueling stories will prevail?

I'm voting for the better half. "There are no signs of a recession on the horizon," says Lakshman Achuthan, managing director of the Economic Cycle Research Institute, which correctly predicted the past three recessions and recoveries. We face a few soft months, he says, followed by a nice recovery. Manufacturing picked up a little last month. He even sees an upturn in the construction sector later this year.

In fact, if you want a house, start looking now, he says. Sales of newly built homes plunged last month, but sales of existing homes rose by the largest amount in the past two years. Prices may fall further. Still, they're well down from their peak-and that doesn't include special deals that sellers may offer, such as new rugs or making repairs. Mortgage rates are still low, so you've got an attractive package.

Stock analyst Steve Leuthold of the Leuthold Group thinks that last week's shock will be a short one, followed by a return to new highs. But it will slam some of the hedge funds that were out on a limb.

What should you and I take from this?

1. Investment diversification works. Bonds gained last week while stocks declined. All the world's equity markets did indeed drop together, but some held up better than others and are recovering faster. People with long holding periods-say, for a distant retirement-should stay substantially in U.S. and international stocks. People nearing retirement should devote more of their money to bonds, to help preserve their capital when equities decline.

2. You have to stay diversified. That means "rebalancing" your investments from time to time. Say, for example, that you choose to be 70 percent in stocks and 30 percent in bonds. After the market's four-year run-up, the value of your stocks might have risen to 80 percent of your portfolio. To rebalance, you'd shift some of your stock money into bonds, to get back to a 70/30 allocation. Had you done so, you'd have kept more of your profits when the market plunged last week. As a practical matter, few of us bother to rebalance or have the stomach for it (why sell stocks when they're going up?). That's why I like "life-cycle" mutual funds. They invest in a mix of stocks and bonds that are appropriate for your age and rebalance for you.

3. Chasing performance is a loser's game. The previous market correction occurred last May and June, when the S&P slid 7.7 percent. Sure enough, 401(k) money fled out of U.S. stocks and into bonds and didn't return until later in the year-after the market was many points up. The money fled into soaring international stocks. But rising interest rates in Europe could slow down its markets this year, Achuthan says.

4. You can't guess when market sentiment will suddenly change. One of the triggers this time was a skid on the Chinese stock exchanges, which toppled fast-money players (and markets) around the world. You can't compete with these global professionals, either in stock-picking or in attempts at market timing. As a practical matter, there's really no strategy but to allocate assets among U.S. and international mutual funds, rebalance regularly (or choose a fund or adviser to rebalance for you) and get on with the rest of your life.

The cyclical bull market should last as long as inflation stays within bounds and the Federal Reserve holds interest rates down, says the Bank Credit Analyst, a research firm based in Montreal. It could be wrong, of course. There are no guarantees. But I'm comfortable with the optimists' case.

-- posted by ECRI

» rrdorsch - Newsweek article

In response to Newsweek article posted by ECRI:

Lakshman,

I sold my condo a year ago because I was getting married and because your LHPI indicator was going down on the weekly update. In hindsight it seems to have been a good decision. We eventually want to get back into a bigger house, but it seems to be a bit early to me. Do you think that the worst is over? Thanks for your insight.

Rod

-- posted by rrdorsch

» ECRI - Newsweek article

In response to Newsweek article posted by rrdorsch:

Hi Rod,

Fist things first - congrats on getting married!

My guess, based on the recovery in the LHPI and in other ECRI leading indexes is that the home price decline will bottom soon, if it hasn't already. That said, timing it perfectly can only happen with a good deal of luck, and local issues may be more important in the short term than the national cycle that the LHPI is designed to forecast.

At the same time, assuming that you'll need a mortgage, the rates now may end up looking pretty attractive in retrospect.

Finally, I'll just say that I strongly advised my younger brother (who is newly engaged) to buy a house now, which he just did (on Long Island).

Good luck.

Lak

-- posted by ECRI

» rrdorsch - Newsweek article

In response to Newsweek article posted by ECRI:

Lakshman,

Thanks I'll start looking this spring.

Rod

-- posted by rrdorsch

» SteveT - Happy Birthday Lakshman!

In response to Happy Birthday Lakshman! posted by Kirk:

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Lakshman, happy birthday. I wish you all the best. I appreciate your contributions here at suite101. You have made a big difference in my understanding of the economy and business cycles.
.

-- posted by SteveT