Vital Signs: Getting a Read on the Damage

On tap: August figures for personal income, consumer spending, home sales, home prices, and construction activity

by James Mehring

The Federal Reserve cut interest rates aggressively on Sept. 18 to prevent the financial firestorm on Wall Street from roaring into the real economy. However, some economists wonder if the Fed may have been too slow in reacting to contain the damage. So far, there has been very little data to assess the impact of the crisis on economic activity, but a few key reports this week will provide more clues on how much the economy is feeling the heat.

One key question is how consumers are reacting to the turmoil in the financial markets on top of a crumbling housing market and signs of a softer labor market. Most economists expect the overall August personal spending number to look pretty good. But a lot of the gain may have come from a surge in vehicle sales, similar to the August retail sales report. The August report would be more reassuring if consumer spending outside of vehicles and gasoline look better than the 0.1% dip revealed in retail sales data.

If consumers are to persevere through these anxious times and keep shopping, income growth must remain strong. Economists see personal income growth slowing a little in August. Indeed, the August employment numbers cast some doubt on whether the 5.4% annualized growth in wages and salaries through July can be sustained.

It's also important to see what businesses are doing outside of hiring. August durable goods orders could show a big retreat in demand, after a solid July. Some September readings of regional factory activity are also coming out. If manufacturers are seeing demand wane, it's an indication that businesses remain cautious about their investment spending which can lead to further pullbacks in hiring.

One area of the economy already up in flames is housing. The latest batch of housing numbers is expected to show weaker sales. Also, expect the S&P Case Shiller monthly report on home prices to show further declines in the once hot markets such as Los Angeles, Miami and Las Vegas and smaller gains in cities such as Portland (Ore.).

While the Fed's rate cut may prop up investor, business, and consumer confidence, it will likely do little for the housing market anytime soon. Tighter lending standards, not higher interest rates, are reducing the pool of potential buyers. But the Fed's rate cut has touched off concerns about higher inflation down the road, which is causing the 10-year Treasury yield -- the rate generally used to set mortgage rates -- to shoot up in recent days. That could curtail near-term demand even further.

Here's the weekly economic calendar, from Action Economics.