Around the Street
Experts Talk About FOMC Minutes, GDP, and Home Prices
BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Nov. 24. Paul Ashworth, Capital Economics The minutes of the Federal Open Market Committee's last policy meeting, which ended on Nov. 4, offer only a few hints of the growing disagreement between hawks and the doves at the Fed. In the statement released after that meeting, the FOMC reiterated its pledge to leave rates at low levels for an "extended period." The minutes note that some members feared that "such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations." In addition, some participants feared that the risks to inflation were already tilted toward the upside "because of the possibility that inflation expectations could rise as a result of the public's concerns about extraordinary monetary policy stimulus and large federal budget deficits." Nevertheless, this is still very much a minority view, at least at the FOMC. Begrudgingly or not, all the members ultimately voted to stick with the status quo. Fed officials thought that they could enhance policy communications by qualifying that rates might rise earlier if resource utilisation, inflation, or inflation expectations turned out to be higher than the Fed expected. However, this is really nothing more than a restatement of the Fed's dual mandate. As we suggested at the time, the decision taken at that meeting to buy a slightly smaller amount of agency debt did "not reflect a decision to scale back the degree of policy accommodation." Finally, the minutes include updates to all the FOMC's forecasts. In general the new forecasts are very similar to the ones made in June: Gross domestic product growth is expected to gradually accelerate while unemployment remains stubbornly high. Most participants thought that it would take about five or six years to close the output gap and get the unemployment rate back down to its natural rate. Overall, nothing here suggests that policy will be tightened in any way in the foreseeable future. Michael Englund, Action Economics Today's U.S. reports revealed the largely expected trimming of reported third-quarter GDP growth from the optimistic "advance" third-quarter figure to growth more in line with prior market assumptions. This came alongside a surprising uptick in consumer confidence, although a new-cycle low reading for the present-conditions index tracked the renewed downtrend in most confidence measures over the last two months. We also saw a restrained Standard & Poor's Case-Shiller increase of 0.3% in September that reflected a moderation in gains following a three-month string of upside surprises for this measure. The Federal Housing Finance Agency home price index was flat in September, also dissipating some of its earlier overperformance. The Richmond Fed index posted a disappointing November drop, to 1 from 7, while the jobs component fell, to -9 from 2. In total, today's reports were consistent with forecasts of an expansion that is proceeding at an exceedingly sluggish pace. Joseph A. LaVorgna, Deutsche Bank Skeptics of the economic recovery claim that the near-term drivers of GDP growth are temporary and as a result, growth will "double dip" next year as inventory levels stabilize and government stimulus spending fades. However, we believe a self-sustaining economic recovery is underway because rising GDP (whether due to temporary stimulus and inventory factors or otherwise) will ultimately generate labor income. In fact, in the details of the revisions to third-quarter GDP, the U.S. Bureau of Economic Analysis noted that second-quarter wage and salary income was revised higher by $82.2 billion. A rebound in wage and salary (W&S) income will be a critical aspect for a sustained economic recovery because it will support consumer spending, which comprises roughly 70% of GDP, and it will also speed the restoration of household balance sheets. As a result, data on October household income [released Nov. 24] merits attention, particularly since previous reports have shown some evidence of a recovering trend in employment income; case in point, W&S rose in two of the past three months and the 3-month rate of change is positive for the first time since October of last year. When W&S growth finally does turn positive—probably in early 2010—this will be an important validation of our broader economic projections. Nick Bennenbroek, Wells Fargo Bank Eurozone figures [released Nov. 24], including confidence, manufacturing and consumer spending data, painted a consistent picture of European recovery, while non-Eurozone data were generally stronger as well. But as we have seen over the past several sessions, the euro has struggled to gain much traction on this favorable news, a further indication that the single currency's rally could be running out of some steam. The euro's price action is all the more interesting, given the strong seasonal tendency for the euro to appreciate into yearend. Another factor that is perhaps helping the dollar and restraining the euro are developments from China, with the banking regulator asking the country's banks to comply with capital requirements. That is injecting more caution into Asian currencies and equity markets in particular.