Friday’s retail sales figures showing that spending fell sharply in September, coupled with a report of weak consumer confidence, were troubling signs that one of the strongest legs holding up the fragile economy might be starting to buckle. Yet a majority of Federal Reserve policy-makers believe enough has been done to resuscitate the ailing economy, and some have been speaking up in recent days defending their position. Do they know something that Wall Street has been missing?
Yes, the Dow Jones industrial average gained more than 500 points in the week’s final two sessions, but given the gloomy economic news and looming possibility of war it was a rally with little apparent conviction behind it. Even after the market’s strong week, the Dow and other major indicators have lost more than 13 percent in the past seven weeks, and let’s not even talk about what they have done over the past seven months.
Bryan Piskorowski, market commentator for Prudential Securities, described the sharp run-up ahead of a quasi-holiday weekend as a “majorly technical” rally, complete with “head-and-shoulders” chart formations, short-covering and a focus on the beaten-down blue-chip names of the Dow.
“I hate sounding skeptical like this, but this is the way I see it,” he said. “I’ve seen too many bear-market rallies to believe this is it … Brave new worlds are not created on some random day with no news flows.”
As the stock market has cratered, many on Wall Street have been looking for a rate cut with increasing urgency, but most Fed officials seem unperturbed by the markets and by economic conditions in general. Fed Vice Chairman Roger Ferguson, in a speech Wednesday, stressed that the central bank has neither the tools nor the inclination to protect the stock market.
“Nobody would deny that central banks can be quite powerful, and that monetary policy works, over time,” he said. “But in the scheme of things, a central bank’s ability to smooth asset prices — if it wanted to — or to buffer shocks to spending or production is somewhat limited.”
Other Fed officials have referred to the current “accommodative” and “stimulative” policy — Fedspeak that means rates are low enough to promote at least moderate economic growth. And despite a rash of warnings about the upcoming third-quarter earnings season, overall economic growth for the quarter is expected to come in at a relatively healthy rate of more than 3 percent — possibly even 4 percent. Growth is expected to slow in the current fourth quarter, but few analysts expect the economy to slip back into recession, even without another Fed rate cut.
“I am quite convinced that the best forecast is for the reasonably strong economic recovery of my country to continue,” New York Fed President William McDonough told members of the European Parliament this week.
Only Dallas Fed chief Robert McTeer, one of two policy-makers who argued for a rate cut at the central bank’s latest rate-setting session in September, has been vocally expressing much concern about the economy.
“Faster real growth is essential,” he said recently. “Job growth is anemic.”
In truth, the latest batch of economic data has been mixed enough to support the case that the economy is likely to continue expanding over the next several quarters.
Lakshman Achuthan, managing director of the Economic Cycle Research Institute, argues that a two-month decline in the unemployment rate, to 5.6 percent from 5.9 percent, is more than a statistical fluke. Looking at the rise average workweek and overtime hours he concludes that there has been a “distinct improvement in overall job conditions.”
Jim Glassman, senior economist at J.P. Morgan, agreed that recent mixed signals on employment are a sign that labor market conditions are improving. “Earlier forecasts that the unemployment rate would peak over 6 percent may prove too pessimistic,” he said in a report.
Employment, of course, is one of the most important indicators of economic health. But weak business and investor confidence remain the significant hurdles to continued expansion, said Achuthan.
“If businesses maintain enough confidence not to engage in a huge round of firings, then we’re going to claw our way to a recovery,” he said.
While September retail activity was the worst in 10 months, the weakness was concentrated in the auto sector after two months of torrid sales fueled by tempting incentives. Excluding auto sales retail activity was up a modest 0.1 percent.
Still consumer spending on discretionary items like consumer electronics, restaurant meals and apparel fell in the third quarter, possibly a reaction to the rising talk of war, said John Silvia, chief economist at Wachovia Securities.
Consumer sentiment, weighed down by the war talk and a stock market tailspin, plunged in early October to its lowest level in eight years, according to a University of Michigan survey.
Consumer sentiment often is a poor predictor of consumer behavior, but the risk of recession cannot be ruled out, especially with a possible war and its potential to disrupt the world’s oil supply. So most economists still expect the Fed to cut short-term rates before the end of the year, if only as an insurance policy.
“In our view the risk of renewed recession is high enough for the Fed to cut rates further,” said Bill Dudley, chief U.S. economist for Goldman Sachs. “From the Fed’s perspective, the risk of easing too much is far less serious than the risk of not cutting sufficiently.”