Investment

» Normxxx - Up And Down Wall Street

Up And Down Wall Street:
Wall Street's Priorities: Jobs, Rates, then Vacation

By Randall W. Forsyth, Barron's | 3 August 2006

The countdown for the evacuation of Wall Street has begun. By 2:30 p.m. Tuesday, most denizens of downtown Manhattan will be departing for points east and north, not to return until September.

What could possibly keep them from fleeing the record heat for the Hamptons, the Vineyard or wherever else the swells summer? It could only be crucial data and decisions about the course of interest rates. And whither go rates, the markets are certain to follow.

The latest remake of Escape From New York will commence after Tuesday's meeting of the Federal Open Market Committee, which will announce its interest-rate decision to a breathless financial world round about 2:15 p.m. As of now, the odds makers in the fed-funds futures say it's less than even money that the Fed's policy-setting will raise its current target for the overnight money rate from the current 5¼%.

But the betting line could change drastically after 8:30 a.m. Friday, when the Labor Department releases the July employment report. The consensus call of economists is for a 150,000 increase in nonfarm payrolls, according to Dow Jones Newswires.

For what it's worth, ADP is forecasting a 99,000 increase in payrolls for July.

[ Normxxx Here:   [Actual] Total nonfarm payroll employment increased by 113,000 in July, and the unemployment rate rose to 4.8 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today, 4 August. ]

The markets themselves are predicting a tad more jobs than the econs. According to the Chicago Mercantile Exchange's Auction Markets for economic releases, these derivatives are looking for a 152,900 increase in nonfarm payrolls.

The conventional wisdom holds that a jobs report showing less than the forecast would allow the FOMC either to pause, to use the buzzword of the moment, or decide that 17 quarter-point increases in the federal funds rate are enough. If the number turns out to be well above that, then rate hike number 18 will be on the FOMC's agenda next week.

Jane Caron, chief economic strategist for Dwight Asset Management in Burlington, Vt., is looking for a 140,000 rise in July's payrolls. But she also avers that the Fed's call depends on more than Friday's jobs report.

Another key report on the labor market will be in the hands of the FOMC when it gathers Tuesday morning— second-quarter numbers on productivity and unit-labor costs. These data have been a source of comfort for Fed Chairman Ben Bernanke, Caron notes. But slower economic growth in the second quarter probably hurt the productivity numbers and thus raised unit-labor costs, she points out. With other indicators pointing to risks of higher inflation, Caron looks for the Fed to hike again next week.

The leading indicators of the Economic Cycle Research Institute are pointing in the other direction. ECRI's Future Inflation Gauge peaked last October and has been rolling over since. The forecasting group's leading and coincident measures of employment stopped rising in February and have been losing momentum since. And ECRI's leading indexes of the U.S. economy are pointing to a clear slowing in growth.

ECRI was founded by the late Geoffrey Moore, who developed the concept of leading indexes to point to turning points in the business cycle. Among his students were two former Fed chairman, Arthur Burns and Alan Greenspan.

Explains Lakshman Achuthan, ECRI's managing director, the Future Inflation Gauge attempts to take into account all the factors that influence the change in the rate of increase in the consumer price index. The FIG started moving up in late 2003 and 2004, when everybody was still worried about deflation and long before energy prices took off. But, with the FIG peaking last October, the rate of increase of the CPI should decelerate from here.

At the same time, ECRI's leading indicators of domestic and global growth are flashing yellow. The long-lead indices— which point to trends a year in advance— have been easing since all the loose monetary policies put in place post-2001 started to be taken back, Achuthan says. Inevitably, those policy lags begin to catch up. Even though he thinks the Fed sees the light at the end of the proverbial tightening tunnel, it's likely to raise rates once more.

"There may come a time when we hold our policy stance unchanged, or even ease, despite adverse price data, should we see signs that underlying forces are acting ultimately to reduce inflation pressures." That quote comes from Greenspan's February 1995 Congressional monetary testimony, recalls David Ader, RBS Greenwich Capital's chief government bond strategist. Mr. G was a fan of ECRI's indicators, which may have persuaded him to call a halt to rate hikes then. Whether his successor will be similarly persuaded remains to be seen.

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

-- posted by Normxxx

» Jas_Jain - Bloomberg Interview

In response to Bloomberg Interview posted by Kirk:

--

"vs 122.6 last month."

No. Here is what I received from someone:

Today’s (Monday’s paper delivered today, Sat.) IBD has an item about the Future Inflation Gauge (FIG) kept by ECRI (Econ Cycle Research Institute). This weekly comment in IBD is the only way I know to see this item now that ECRI charges for it.

“ECRI’s FIG rose to 124 in July from an upwardly revised 123.3 in June, signaling inflation pressures gained in the latest month. Lower interest rates, higher commodity prices and slower vendor performance boosted the indicator. The private group said the readings suggest that while underlying inflation pressures have peaked, they still remain elevated. The index’s annualized growth rate rose to 1.7% from an upwardly revised 1.6% in June.”

“Euro zone inflation pressures fell back in June after reaching 5 ½ yr highs in April, said ECRI. But levels still back views of further European Central Bank hikes. The ECB and U.K. central band both hiked rates Thurs.”

-x-x-x-x-x-x-x-x-

Jas

-- posted by Jas_Jain

» mdorsey - Revised?

"1.7 percent from an upwardly revised 1.6 percent in June. The growth rate was originally pegged at 0.5 percent."

Over a 200% revision. That original 0.5% was a big miss. If they revise again next time by the same multiple the growth rate would be over 4.5%. That makes me wonder if the initial reported number has much value.

-- posted by mdorsey

» ECRI - Revised?

In response to Revised? posted by mdorsey:

Please recall the following, and it may help clear up some of the confusion:

1. The level of the FIG is the leading indicator of inflation, not the growth rate.
2. “Over a 200% revision.” This is not the best use of statistics. For example, if the growth rate were revised from 0.1% to 0.4% that would count as a 300% revision? What about a revision from 0.0% to 0.1%? That would be an infinite percentage revision!

Yes, the FIG gets revised, but it’s not as big a deal as suggested. Let’s take a look at what we actually said when the data was released over the last two months:

July 7, 2006
"With the (gauge) declining in June, inflation pressures remain in a gradual easing trend that began after it hit a five-and-a-half-year high last October,"

August 4, 2006
While remaining below its October high, the (gauge) has crept up in recent months. Thus, underlying inflation pressures may have peaked, but still remain elevated,"

Furthermore, if you looked at a chart of the FIG you’d see that the cyclical picture does not change significantly as a result of the revision.

I hope this is helpful.

-- posted by ECRI

» mdorsey - Revised?

In response to Revised? posted by ECRI:

Part of my confusion is the comparison of new data to revised numbers. Apples and oranges. I notice the press does that with other economic data as well.

I say the inflation pressures have not peaked and are not going to be lowered much by a slowing economy. Of course this is only my opinion based upon my observations. In the fullness of time(1 year) we'll see.

-- posted by mdorsey

» ECRI - Fed Skips Rate Hike

Fed Skips Rate Hike, Cites Slower Growth
August 8, 2006
By Greg Ip
Of THE WALL STREET JOURNAL

WASHINGTON (Dow Jones)--The Federal Reserve left interest rates steady on Tuesday for the first time in two years, gambling that a nascent economic slowdown will cap growing inflation pressures.

In leaving its short-term interest rate target at 5.25%, the Fed said: "Readings on core inflation have been elevated in recent months," but "inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors."

(This story and related background material will be available on The Wall Street Journal's Web site, WSJ.com)

For the first time since Ben Bernanke took over as chairman on Feb. 1 from Alan Greenspan, the policy-setting Federal Open Market Committee did not agree to the action unanimously. Federal Reserve Bank of Richmond president Jeffrey Lacker dissented, favoring instead another quarter-point increase.

The statement said, as it did after the last meeting in June, "Some inflation risks remain. The extent and timing of any additional (increases) ... to address these risks will depend on the evolution of the outlook for both inflation and economic growth." The retention of that sentence, in effect, reflects a continued bias, but not a presumption, to raise rates in the future. The Fed effectively gave itself some breathing room to assess the impact of the preceding 17 quarter-point rate increases before deciding whether to hike again. Bernanke has been suggesting since April that he was seeking more flexibility.

"A pause does not mean a stop," said Stephen Stanley, chief economist at RBS Greenwich Capital Markets. "And there's certainly ample evidence the economy has been on a slowing trajectory over the last couple months. There's enough evidence there for them to take six weeks off."

Signs of slowing growth and rising inflation have aroused deep disagreements among economists on what the Fed should do. Some economists think the Fed has already raised rates too far and is courting recession; some think it must raise them further to stop inflation from accelerating.

Some say both things are true. "You can't fight inflation without risking overkill on the economy," said Ethan Harris, chief U.S. economist at Lehman Brothers, who thinks the Fed shouldn't have paused and predicts it will eventually raise the rate to 5.75%. "That is a risk, and it's a risk they should take." He added: "It's not fair to Bernanke that he steps into his job just as the economy is set to decelerate and inflation takes off."

The Fed's view has been that inflation recently topped the informal "comfort zone" of 1% to 2%, excluding food and energy, primarily because firms have passed higher energy costs on to consumers. If growth does not exceed "potential" - the rate at which the economy can grow without straining the available workforce and capital stock - and energy prices stabilize, the Fed figures inflation should drop back. Meanwhile, it believes that as the housing market cools and consumer spending slows, business investment and exports will pick up the slack.

But recent data have not been supportive of that view. Economic growth slowed to 2.5% annual rate in the second quarter, in part because of a surprise drop in business equipment investment. Macroeconomic Advisers, a forecasting firm, predicts it will grow at about the same moderate rate in the current quarter. Payroll growth was sluggish, and the unemployment rate rose in July.

But at the same time, inflation has ticked higher, and new data on productivity, growth and labor costs suggest that inflation pressures have been bubbling longer than previously realized.

The Labor Department said Tuesday nonfarm business productivity grew at a 1.1% annual rate in the first quarter, a sharp decline from the 4.3% growth rate of the first quarter, and was up 2.4% from a year earlier. At the same time, labor costs per unit of output climbed 4.2% in the second quarter and were up 3.2% from a year earlier. Labor costs were actually declining in 2004, but have steadily accelerated since, and now are rising fast enough to eat into profit margins - which could encourage firms to try harder to raise prices. Importantly, Tuesday's Fed statement did not repeat a reference from June's that "ongoing productivity gains have held down the rise in unit labor costs".

Revisions to economic data from 2003 to 2005 also show the economy grew less quickly and inflation was a bit higher than previously thought. That, economists say, suggests the economy's "potential" growth rate is lower than previously realized, and the economy may already be straining capacity.

None of this means the Fed is making a mistake now. Indeed, inflation and labor costs were both rising in 2000 when it last stopped raising rates after a cycle of increases. In retrospect, however, the downturn in tech stocks and subsequent decline in tech investment had already set in motion a slide into recession the following year and a big drop in inflation. There are concerns that an accelerating downturn in the housing market today could similarly undermine the overall economy now.

"There was a strong case for pausing at 4.5%," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "There was already plenty of evidence the previous hikes had begun to soften growth." He predicts the Fed will start to cut rates by next April.

Nouriel Roubini, an economist at New York University and author of a popular economics blog, said it's already too late to prevent a recession. "The Fed should have tightened earlier to avoid a festering of the housing bubble early on. The Fed is facing a nightmare now: the recession will come and easing will not prevent it."

Lakshman Achuthan, managing director at the New York-based Economic Cycle Research Institute, said the economy is not now headed into recession, but it is slowing and thus more vulnerable to some kind of shock that tips it into one. At the same time, he said, inflation shows no sign of turning down soon. So, "The Fed may have to stay in the game, even though there are elements slowing the economy that still have to play out."

Links in this article:

URL for this article:
http://www.smartmoney.com/bn/smw/index.c...

-- posted by ECRI

» mdorsey - Weekly Leading Index Unchanged

In response to Weekly Leading Index Unchanged posted by Kirk:

There you go again. I would have reported the change as 0.1 not flat. I would compare unrevised numbers.

-- posted by mdorsey

» ECRI - WLI Level Ticks Up

NEW YORK, Aug 18 (Reuters) - A gauge of future U.S. economic growth ticked up slightly in the latest week, a report showed on Friday, although its annualized growth rate fell for a second straight week.

ECRI, an independent forecasting group, said its weekly leading index edged up to 135.3 in the week to Aug. 11 from a downwardly revised 135.1 in the prior week. It was originally pegged at 135.5.

The weekly leading index "edged up due to lower joblessness and higher money supply, mostly offset by weaker housing activity and stock prices," said Lakshman Achuthan, a managing director at the Economic Cycle Research Institute.

The index's annualized growth fell in the latest week to negative 1.4 percent. The prior week's growth rate was negative 0.8 percent, revised downwards from 0.4 percent.

"With weekly leading index growth now at a 93-week low, U.S. economic growth prospects continue to dim," said Achuthan.

-- posted by ECRI

» ECRI - WLI Level Ticks Up - Recession Call soon?

In response to WLI Level Ticks Up - Recession Call soon? posted by Kirk:

Hi Kirk,

A few quick comments...

1. For ECRI to make a recession call we would be looking at the 3Ps, notonly of the WLI but also of the other indexes in our array (see Cube near bottom of this page http://www.businesscycle.com/approach.ph...

2. For example, our Leading Services Index is not yet as weak as it was prior to the last recession.

3. For a little more commentary - I was an hour-long guest on an NPR show with Tom Ashbrook the other day.

Show title -- What lies ahead for the U.S. economy: Recession, inflation, "stagnation" or smooth sailing?

For online podcast go to item #4 here: On Point Podcast http://www.podnova.com/index_podnova_sta...

-- posted by ECRI

» ECRI - WLI Level Ticks Up - Recession Call soon?

In response to WLI Level Ticks Up - Recession Call soon? posted by Kirk:

Try this link, you should see a cube near the bottom showing various leading indexes that we monitor http://www.businesscycle.com/approach.php

-- posted by ECRI