February 1, 2006
WILL THE REAL ECONOMY PLEASE STAND UP?
On the first day of the newly minted Bernanke era, the pressing question is whether the economy's slowing, and if so, is it slowing more than a little?
The topic returned to the limelight last week when the first estimate of the nation's gross domestic product surprised with a sharply lower rate of growth than the dismal science was expecting. Optimists quickly responded that something was rotten in the data, and that future revisions of GDP would return the official measure of the economy's pace to form, namely, robust growth.
Judging by consumer spending of late, the optimists have reason to cheer. As the government reported on Monday, Joe Sixpack and his friends are in no mood to reign in their spendthrift ways. Personal consumption rose a strong 0.9% in December, as it did in November, based on revised numbers. Back-to-back strength, in no uncertain terms. Take that, you pessimists. Underscoring the trend is the fact that durable goods purchases were in the driver's seat for pushing overall consumption higher in the final two months of 2005.
If a sharp slowdown, or worse, is coming, Joe seems cheerfully oblivious to the threat. As such, one might wonder if a slowdown is probable, or even possible if Joe and his buddies aren't on board with the idea. Personal consumption spending, after all, represents around 70% of GDP. As goes consumers' willingness to use the heralded credit card, so goes the economy.
By that crude measure, it's hard to accept last week's warning sign dispensed in the fourth-quarter GDP numbers. Consider that the sharply lower annualized pace of economic growth during October through December of last year (1.1% v. 4.1% for the third quarter) came in large part due to the reported drop in durable goods-related personal spending. To be precise, consumer spending on durable goods dropped a staggering 17.5% in last year's fourth quarter v. the previous period, according to the GDP numbers. But wait, there's more: the GDP stats don't square with ongoing party in personal consumption as profiled by the personal income and outlays data series for November and December.
One set of numbers is wrong. But which set?
We can only imagine what Ben Bernanke, the new Fed chief, thinks of all this, or if he thinks of it at all. But whether he remains quiet or speaks, the relevance for clarifying the statistical discrepancy can't be denied, even if it must be delayed. To state the obvious, if the economy lives up to the portrait of weakness painted by the fourth-quarter GDP report, the central bank may be inclined to end its current round of interest rate hikes, which has been ongoing since June 2004. Indeed, yesterday's 25-basis-point hike brings Fed funds to 4.5%.
Alternatively, if the personal consumption reports of November and December prevail as constituting the real world, Ben may be inclined to keep tightening monetary policy.
Alas, Ben's not talking as to which view of the world he prefers, nor is he likely to reveal himself before the next Federal Open Market Committee meeting, scheduled for March 28. Much can happen between now and then, leaving investors with the uninviting task of guessing what comes next.
Among those who are paid to do no less is Charles Dumas of Lombard Street Research, who ventured out on that slim forecasting limb on Monday by writing in a note to clients that "rapid [personal] spending growth should support profits, helping stock prices." As for anyone who thinks that the "illusory softness" displayed in the fourth-quarter GDP report will bring an end to the Fed's rate hikes, think again, Dumas advises. The strong blast of consumer spending in November and December "makes it likely that Q1 GDP will rebound to at least a 5% rate, probably 6% or more...." But here's the kicker: the rebound will be short lived, he predicts. "After that the crumbling housing picture could take over...."
Perhaps. But the devil's in the details these days, and the details aren't necessarily clear of late.
The bond market's current bet, for what it's worth, seems disposed toward anticipating continued Fed hikes and economic growth. The 10-year Treasury yield has been north of 4.5% this week, up from as low as roughly 4.3% in early January.
Of course, with nearly two months to go before the Fed makes an official statement on the price of money, the data as we know it could yet change, and dramatically so. But if transparency about the future is in a state of unusually short supply, bond investors are being asked to swallow hard and worry not when it comes to any fear that rates could rise further. And investors are more than willing to comply.
Bloomberg News reported yesterday that the appetite for 30-year corporate bonds is alive and kicking. The folks over at Treasury no doubt take that as a good sign for market sentiment regarding the relaunch of the 30-year government bond, scheduled for February 9.
The Treasury Department is nothing if not bold in rolling out its formerly mothballed 30-year bond at a time when the government's red ink has jumped considerably since the security last made an appearance in 2001. We'll leave it to Mr. Market to decide if this is progress. The first hint of a definition comes on February 9.
Posted by jp at February 1, 2006 11:01 AM
Yes, it's true that he'll testify ahead of the FOMC meeting, but don't hold your breath waiting for him to reveal in February whether the Fed will (or won't) raise interest rates in March. Thus my lament.
Posted by: Jim Picerno at February 2, 2006 10:52 AM
Alas, Ben's not talking as to which view of the world he prefers, nor is he likely to reveal himself before the next Federal Open Market Committee meeting, scheduled for March 28.
BERNANKE IS DOING HIS HUMPHREY HAWKINS TESTIMONY MID-FEB!!!
Posted by: anonymous at February 2, 2006 9:30 AM
how much of a dollar is worth spending ? the value left gives me chills. percentage taken away before you even spend is a good worry. social sec. could be taxed from regular spending and the dollar could grow , however the value of a dollar.
Posted by: Anonymous at February 1, 2006 12:21 PM