Economic stats will set the stage for
the Fed
By Greg
McBride, CFA • Bankrate.com
This week will be a busy week of economic releases.
The data will be critical in shaping the Federal Open Market Committee
meeting on Sept. 21 -- and quite possibly the meetings to follow.
Another quarter-point rate move is widely expected
at the Sept. 21 meeting of the Federal Open Market Committee, a
belief that will either be validated by positive economic data or
turned on its ear by a run of disappointing data. But expectations
for Fed action beyond Sept. 21 will also begin to take shape in
response to the string of economic reports. Current expectations
are for a Fed interest rate move in either November or December,
but not at both meetings. If the type of unmistakably strong economic
data that characterized the first quarter of 2004 re-emerges, then
expectations for more aggressive interest rate movement by the Fed
will quickly be reflected in financial markets. Sluggish economic
performance will reinforce the recent calls for the Fed to hold
off on further increases in the latter portion of 2004.
The week begins with the July reports on personal
income and personal spending. Consumer spending accounts for two-thirds
of economic output, and after an uncharacteristic drop-off in June,
the July report will garner increased attention. Economic worrywarts
would rather see Alan Greenspan walk under a ladder or cross paths
with a black cat than see another decline in consumer spending.
Even if spending rebounds, the increase in spending will be evaluated
relative to the growth in income. If spending rises faster than
income, this indicates consumers are still heavily reliant on debt.
With the average household saving just 2 percent of disposable income,
there is little capacity for debt burdens to continue growing unabated.
Tuesday marks the end of the month and also brings
readings on consumer confidence and the Chicago Purchasing Managers'
Index. Consumer confidence has long been a flimsy statistic with
little predictive power in terms of consumer spending, but financial
markets respond to it nonetheless. This fact alone makes the release
noteworthy, but the Fed has always shown consideration for consumer
and business confidence indicators and how they may be affected
by interest rate moves.
The Tuesday release of the Chicago PMI is a regional
glimpse at manufacturing conditions in the manufacturing-heavy Midwest.
It also is an indicator of the national Institute for Supply Management
index that is released Wednesday. The monthly ISM index is closely
scrutinized for broad conditions in the manufacturing sector, but
two components warrant particular attention. The prices paid component,
having retreated nicely in July, is watched as a measure of coming
inflation pressures. If it costs more at the supplier level, it
will cost more at the consumer level, so the thinking goes. Another
component that draws attention deals with new orders, as this is
the lifeblood of the manufacturing sector and an indicator of the
sector's true strength.
If there is an off day during the week, it would be
Thursday. Only a revision to second-quarter productivity is due
for release Sept. 2. The Fed continues to reference the "robust
underlying growth in productivity" in each post-meeting statement,
even if the pace of productivity growth is slowing from sizzling
to respectable. Since the Fed watches this barometer, economy watchdogs
do as well.
The week will end with the most significant
release of the bunch, the July Employment Report. After two months
of disappointing reports on job growth, the employment report has
not lost any prominence. Nothing seems to shape economic expectations
and consumer confidence like a report on jobs. To consumers and
businesses alike, an economy adding 200,000 jobs per month is seen
as a vibrant economy. Unfortunately, the forecasts call for another
sub-par month of job growth. If that is indeed the case, public
sentiment against a September rate hike will mount. Whether Alan
Greenspan and the FOMC would depart from the course in that event
remains to be seen. But the Fed has left themselves with little
wiggle room to gracefully back away from an intended rate hike Sept.
21.
Greg McBride is a financial analyst
for Bankrate.com.
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