Vital Signs: Investors Want More Cuts from the Fed

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VEHICLE SALES - Friday, Feb. 1

Auto makers announce January light vehicle sales results. In December, sales came in at 16.2 million units, virtually unchanged from November, but off nearly 3% from a year ago. In 2007, total sales slipped 2.5% to 16.1 million units on weaker economic conditions and surging energy prices. According to Global Insight, 2008 sales are forecast to slow to 15.6 million vehicles, a 3.5% drop from 2007.

EMPLOYMENT REPORT - Friday, Feb. 1, 8:30 a.m. EST

Hiring in January is expected to be a little better than December. Nonfarm payrolls edged up by just 18,000 workers in the final month of 2007, but that was driven by government hiring. There's one piece of data that offers some hope of a better-than-expected January report. Initial jobless claims retreated during the month after steadily rising in December.

In December, private employment fell by 13,000 workers, with construction and manufacturing employers cutting 75,000 positions. Private service-sector payrolls grew by 93,000 workers, with most of the gains coming in professional and business services, health care, and leisure and hospitality. Another sign of potential fraying in the economy was the decline in retail jobs as well as drops in ground transportation and virtually no change in other transportation areas. Transportation is an area to watch, as continued declines may indicate less demand to haul goods and weaker economic activity.

In recent months, the weaker pace of hiring has not been strong enough to keep the jobless rate from rising. In December, the unemployment rate touched 5% for the first time since November of 2005. The 0.3% point increase from 4.7% was the biggest in over six years. If hiring in January comes in as expected, the unemployment rate could tick up a little higher -- although economists expect it to stay at 5%.

Another upshot from a weaker job market is slower wage growth. With less demand for workers and a larger pool of unemployed persons, the need to raise wages diminishes. In December, the yearly pace of average hourly earnings slipped to 3.7% from 4.3% in December of 2006. For January, economists are forecasting a mild 0.3% gain. On an annualized basis, the expected January gain is in line with the current yearly pace of growth.

Besides the fresh January figures, the Bureau of Labor Statistics will release revised nonfarm payroll employment, hours, and earnings figures for the 12-month period through March of 2007. The revisions could cast a different light on how tight the job market was before economic conditions deteriorated.

ISM SURVEY - Friday, Feb. 1, 10 a.m. EST

Factory activity kept contracting in January, according to economists surveyed by Action Economics. In December, the purchasing managers’ index plunged to 47.7%, from 50.8% in November. A reading below 50% is associated with a decline in factory output.

In reality, factory activity doesn’t typically fall on a yearly basis until the PMI slips to levels just above 47%. No matter, the retreat in December was disconcerting to economists and investors, slightly raising the odds of an economic recession in the first half of 2008.

Among the components, both new orders and production flipped from showing small gains in November to declines during December. Both indexes fell to six-year lows in December. Another worrisome result was the index tracking export orders, which fell to 52.5%, from 58.5% in November. The sharp slowdown raises concerns that economies abroad are also starting to cool, resulting in weaker export growth.

CONSUMER SENTIMENT INDEX - Friday, Feb. 1, 10 a.m. EST

The University of Michigan and Reuters issues the final January reading of consumer sentiment. The final results are expected to show some backsliding from the initially reported results. The preliminary January reading was 80.5, up from 75.5 in December and 76.1 in November. People expressed more optimism about both current conditions and future expectations. Perhaps more heartening was a jump in the index tracking respondents’ views on buying durable goods. It climbed to a six month high of 154.

Some of the gain may be attributable to easing gasoline prices in December, after an upswing in November. To that point, respondents felt a little better about their personal finances and were a little more hopeful about the upcoming 12 months. Views on the economy were also less pessimistic.

However, tumbling stock prices, mounting concerns of a U.S. recession, and the unexpected Jan. 22 rate cut by the Fed could spook consumers and lead to a complete reversal in the early January gains.

CONSTRUCTION SPENDING - Friday, Feb. 1, 10 a.m. EST

Construction spending probably fell in December, and the numbers may show the weakness is spreading beyond housing. There are rumblings that commercial real estate is losing its luster and concerns about economic growth could begin to crimp growth in other commercial categories. In November, total outlays were up 0.1%. Once again, private residential construction fell 2.5%, while private non-residential spending climbed 1.7%, and public building grew 2.5%.

There are increasing concerns that the ongoing credit crisis will crimp funding for some commercial projects and cool off what has been a very impressive run in non-residential building. This is an important trend to watch. Since the start of 2006, nonresidential construction has, on average, contributed 0.4% point to inflation adjusted economic growth each quarter.

Mehring is economics writer for BusinessWeek .