The Fed and the People: Looking in Different Directions

Once again, officials in Washington seem to be looking in a different direction than businessmen (and women) on Main Street. At last week's gathering of the Federal Open Market Committee, the Federal Reserve's policymaking arm left interest rates unchanged but indicated that rising prices are the biggest threat we face. In "CFOs More Concerned About Recession Than Inflation," some of those who are closest to the action see things differently.

At its most recent meeting on Wednesday, the Federal Reserve issued a mixed view on the risks of inflation vs. recession. But CFOs are less ambiguous: They rank economic slowdown as their biggest concern.

Twenty-four percent of the CFOs participating in the 2007 first quarter "CFO Outlook Survey," conducted by Financial Executives International (FEI) and Baruch College's Zicklin School of Business, are quite to very concerned about recession, compared to only 10 percent who feel the same about inflation.

When asked to rank economic worries, U.S. economic growth was at the top, with inflation a distant tenth. Health care costs, consumer demand and costs of regulatory compliance were also prevalent concerns.

Not everyone who interprets the economic tea leaves accepts the party line, however. In Thursday's Daily Global Commentary, Northern Trust's well-regarded Economic Research Department notes that the "Index of Leading Economic Indicators Sends a Warning Signal."

The Index of Leading Economic Indicators (LEI) declined 0.5% in February after a revised 0.3% drop in the prior month. This puts the year-to-year decline at 0.4%, after a similar reading in January. The January-February average of the LEI is down 0.5% from a year ago. If this were followed by additional quarterly readings that are negative and larger in size, a recession is strongly likely. Historically, negative quarterly year-to-year changes of the LEI are associated with recessions in the economy, with the exception of one false signal in the mid-1960s....There is a possibility that January and February may be revised and readings during the months ahead may yield positive year-to-year changes. However, the current January-February data are sending a convincing signal about weak economic conditions in the near term.

My guess is that it will be policymakers, not indicators, that will soon be headed in another direction.