Are We on the Brink of Economic Turmoil? Maybe Not

by: Caleb Sevian

Every day I pore over the papers, internet sites and research reports looking for information about the economy. Over the last week I was struck by the number of pundits expounding economic forecasts proclaiming their outlook is vastly superior to the Fed. The majority of these economists have believe the Fed is wrong for some reason or another and that 2007 will surely be a gloomier year than the Fed thinks it will. If only I were smarter than the Fed too.

Perhaps it would be worthwhile taking a look at what the Fed is saying and comparing our current economic situation with the last time we stood on the brink of economic turmoil in December of 2000. Luckily, The New York Times was kind enough to cover this topic in an article earlier this week. To summarize what the article said, the Fed sees “moderate growth” with “tight” labor markets. They are expecting a sluggish first half of 2007 with growth picking up later in the year. It also may be of interest that currently Fed Fund Futures are predicting with certainty a rate cut by June. The Fed is trying to balance the risks of slowing growth with inflationary pressures and has made it clear that it prioritizes the later, though the tides seem to be shifting. The NYT published a table comparing figures from Dec 2000 versus November 2006: Unemployment 3.9% vs. 4.4%, Core Inflation 2.5% vs. 2.7%, 10 Treasury 5.53% vs. 4.43%, S&P500 -10% vs. +13%. The last point is the most telling difference.

Friday’s Bureau of Labor Statistic numbers showed an economy resilient in the face of a fading housing market as jobs and wage growth continued to out pace expectations. The debate about the economy is centered on the consumer with the central question being can they continue to spend given the slump in housing. Last week the New York Times printed an article about an auction for homes in Florida. The take away was that prices were down 20-30% year over year. This was followed be interviews with several real estate agents that concurred. Although the government statistics are not showing this kind of devaluation, I’m inclined to believe that consumers are aware of it. Even so, The University of Michigan’s Consumer Confidence Survey is still reading north of 90, well above historical averages indicating that consumers are on the whole still optimistic, or blissfully ignorant. This might be because energy prices are down 20-30% from earlier this year, last month we added 132,000 jobs [above expectations], unemployment held near its low at 4.5%, and Average Weekly Earnings was up 4.2% year over year.

The duel in the economy continues between the manufacturing sector being dragged down by housing and autos and the service sector still continuing to expand. The big questions on every ones minds are will the manufacturing slow down be enough to pull down the service sector or will the economy continue to power forward propped up by falling mortgage rates rescuing ailing home owners in search of creative ways to support their spending habits, or will the sell off in the greenback undermine low yields and jeopardize the soft landing scenario. Either way in my estimation the Fed seems to be getting it right this time, and although I believe GDP numbers will likely disappoint, I also believe the out general outlook for 2007 does not include a recession and will unfold with out jolts under the steady hand of the Fed.