The upcoming week will be dominated not by statistics, but by rhetoric -- and the dominant theme will still be the economy.
Not that the economy was out of view in the week just ended, with a new round of reports reminding us of just how bad the economy is and how interrelated it is.
Friday’s report on consumer prices hinted at good news showing a sharp reduction in the consumer price index and the lowest inflation rate (the year-year change in the consumer price index) since 1955.
You could almost though draw a straight line from the CPI report for December back to the report Wednesday on retail sales for the same month which showed retail sales fell 2.7% from November to December, the sixth consecutive monthly decline. The connection? Well Wednesday’s report was based on actual dollars spent and reflected serious price discounts allowed by retailers to entice shoppers into stores. So, the “good news” of slower inflation indeed was another sign of the economic slump.
And, in fact, the slower inflation is approaching deflation which is a much more difficult problem to address than its mirror-image, inflation. To address inflation, the Federal Reserve can tighten the money supply through its main tool of setting the target Fed Funds rate -- the rate banks use to lend money to each other. As that rate increases, less money is in circulation and with fewer dollars chasing goods, prices come down. Increasing the money supply -- as the Federal Open Market Committee has done -- generally means more dollars chasing goods increasing prices. That’s the way it’s supposed to work.
In the current environment, even as the FOMC cut interest rates, prices are falling because even with the lower cost of credit, consumers have cut back spending because of concerns about jobs and income. These concerns ripple through the rest of the economy: as consumers buy less, stores have no need to restock shelves, thus no need to order new merchandise, idling manufacturing plants.
The report in the last week on business inventories affirmed that relationship. The inventory-sales ratio for all businesses rose to 1.41 -- its highest level since the 2001 recession -- and the retail inventory-sales ratio rose to 1.58, its highest level since August 2004. The ratio is an arithmetic representation of how quickly a business will have to replenish stock; the higher the number, the longer between orders placed by businesses or retailers, adding to the slump.
It was, therefore, no surprise the Federal Reserve reported Friday a continued decline in both industrial production and capacity utilization in December. These data were consistent with other economic indicators all stemming from a slowdown in consumer spending which reduces demand and in turn reduces production.
Both production and capacity utilization continued to decline even after the end of the 2001 recession and the official “trough” of the 1990-91 slump. That would corroborate suggestions of continued strains for the overall economy. The “good news” from the data though is that unused capacity -- marked by a declining capacity utilization rate -- also eases inflation concerns.
It was therefore no surprise also that Friday the Economic Advisory Committee of the American Bankers Association said significant efforts would be required by Washington policymakers to ensure recovery takes hold later this year. Bank of America CEO Ken Lewis, in discussing his company’s earnings report, offered the economy would likely not recover until the end of the year at the earliest.
The consensus of the ABA economists though was the economy fell at the sharpest rate in nearly three decades in the fourth quarter of last year, and that the downturn will continue through the first half of 2009. The committee suggested the unemployment rate would increase to 8.5% (from the current 7.2%) later this year, its highest level since 1983.
The ABA economists were optimistic “a substantial stimulus package combined with continued monetary ease by the Federal Reserve should bring the economy out of recession before the end of the year.”
The committee tempered its optimistic with “downside risks” noting consumers may continue to retrench, saving more and spending less, further weakening demand for goods and services.
With that we could see some surprising upbeat numbers in the limited data to be reported in the upcoming week. The upswing in mortgage demand – although most of it has been for refinance applications -- could lead to some optimism among home-builders who report their monthly Housing Market Index Wednesday. The index consists of three measures including buyer traffic which could see a boost from falling mortgage rates.
In the through-the-looking-glass world of economic data, weaker numbers Thursday when the Commerce Department reports housing permits and starts could be good news, hinting the inventory of unsold new homes could continue to fall. That said, data in the last few months show builders have completed almost twice as many homes as they’ve sold for the past three months.
MONDAY1/19NO DATA RELEASES – MARTIN LUTHER KING JR DAYAuto industry braces for more bad news
Consumers, Retailers to take Spotlight in Week Ahead
Jobs Report Likely to Kill New Year’s Buzz
