Is the economy slowing or isn’t it? As always, there are competing views and conflicting data. That doesn’t stop some from making predictions, including Lakshman Achuthan, managing director of the Economic Cycle Research Institute, who advised in an interview with CS last week that the first-quarter bounce would give way to something less impressive in the second half of this year.
Adding support for Achuthan’s outlook is yesterday’s update on the Conference Board’s leading index, which posted a slight decline last month. That comes after a larger drop in February. But even this downward bias of late, which implies slower growth in the months ahead, isn’t quite the negative it appears to be.
“Despite the weakness in the leading index in February and March,” the Conference Board said in a press release yesterday, “its six month growth rate picked up to an average of 3.2% annual rate in the first quarter, up from an average growth rate of 2.7% in the fourth quarter, which was higher than its average growth of 1.8% in 2005.” In addition, five of the ten indicators that make up the leading index increased in March.
Ok, so is the economic glass half full or half empty? One could make a case for either, although today’s release of survey results from the National Association of Business Economists leans toward the glass-is-half-full view. “Results of the April NABE industry survey suggests continued economic growth but with somewhat greater price pressures,” says Ken Simonson, chief economist, Associated General Contractors of America, in a press release accompanying the survey, which reflects the views of 116 economists who are NABE members.

Among the highlights from the full NABE report obtained by CS:
* 55% of NABE economists said the demand for goods and services is rising in the April survey. Although that’s down from 62% in the January poll, it’s up from 51% from 12 months previous.
* 34% of NABE economists reported that employment is rising, up from 30% in the January survey and from 29% in the April 2005 poll.
* 43% of NABE economists said that capital spending is rising, up from both the 40% reading in January and 36% from April 2005.
* While the overwhelming majority of NABE panelists anticipate a slowing of the housing sector in the next six months, most expect that this will have minimal impact on their firms.
* The NABE industry panel of economists was more upbeat in their real GDP outlook for 2006 as a whole compared with three months earlier. Overall, 34% of respondents said they were more optimistic on the year with their current forecast for economic growth– twice the percentage who say they’re becoming “somewhat” more pessimistic.
If the strategic choice is one of economic growth or economic slowing, the bond market seems inclined to choose the former. The yield on the benchmark 10-year Treasury Note continues to climb, rising back above the 5.0% mark for the second day running as of yesterday’s close. The sentiment that anticipates growth finds support in the stock market recently: the S&P 500 in intraday trading yesterday reached its highest level since 2001.
But then there’s the bit of news from earlier this week that the Fed may be close to ending the rate hikes that have prevailed for nearly two years, or so suggests some of the commentary published in the Fed minutes for the FOMC meeting on March 27 and 28 released on April 18. The stock market obviously likes the news, but as a policy matter there’s more to consider and potentially fear.
Yes, the Fed will hike again by 25 basis points at the May 27/28 meeting, bringing Fed funds to 5.0%. Or so the futures market predicts. But the outlook becomes cloudy beyond that. June Fed fund futures, for instance, are somewhat ambivalent about forecasting the outcome of that month’s FOMC meeting on the 28th and 29th.
Ambivalence and caution in fact may be the prudent path for the moment. There are risks looming over rate hikes just as there are risks threatening if there’s a decision to cease additional monetary tightening.
Oak Associates’ chief investment strategist Ed Yardeni nails the dilemma head on by calling it “Bernanke’s Conundrum” in a note sent to clients today. “If he stops raising rates to avert a housing-led recession, commodity prices, in general, and oil prices, in particular, might rise to levels that either cause a supply-shock recession or else boost inflation, forcing the Fed to resume tightening at the August 8 meeting,” he writes.
On the other hand, there’s a case to be made that globalization has “moderated and shortened” recessions, Yardeni observes. If that’s the case, the Fed may still have more leeway to keep raising rates. But there’s no free lunch. “If Globalization means that economic expansions can last longer, does it follow that the less frequent recessionary shocks will be much greater than in the past, and the economic downturns might be much deeper and longer, though less frequent? I’m not sure, but it is a possibility.”
In any case, the former Fed chairman, Alan Greenspan, has noted that economic growth has become less volatile over the past 20 years, Yardeni notes. Others have made similar observations. A working paper from three New York University professors–The Declining Equity Premium: What Role Does Macroeconomic Risk Play? finds that there’s been “a fall in macroeconomic risk, or the volatility of the aggregate economy” in recent decades.
For investors, deciding what Bernanke’s Conundrum will produce in the weeks and months ahead is at once a burning issue and one with no easy answers. So, what else is new? At least there’s a consistent theme to the 21st century.
© 2006 by James Picerno. All rights reserved.