Thursday, February 01, 2007


Not sure the iambic pentameter is working here, but hopefully the title catches your attention to the onslaught of data and the Fed. Stronger than expected GDP despite a 19% drop in residential investment, which took 1.2 percentage points off of growth, and an FOMC statement that moved the Fed from Dec's worrying about growth to confidence that the economy will grow -- while acknowledging that inflation has ebbed.

The market, in its infinite wisdom, rallied on the news, believing that the comments on inflation were setting the stage for an ease later this year. Since December, the market has moved its ease scenario out in time and down in its extent, but it is still betting on an ease beginning in August but definitely by December. Some of the market gurus, mostly wrong but never in doubt, are out there pitching the idea that softness is to come, 4th Q was a statistical anamoly, and look for an ease by July.

Markets want to read into to the statement what they want to believe. I believe something different. The Fed is telling us that the concerns they had about growth are past or at least passing, so they can be more confident in their forecast of continued moderate growth. As for inflation, they acknowledge the drop and they know it is energy related. They are also saying that resource use is tight and thus the risk for inflation remains.

So, tell me, if the Fed is confident about growth, which means greater utilization of resources, why does the market think the next move is an ease?

Two things to remember about this economy. First, it runs on credit and there is plenty available. Second, this economy is "adapt and grow". It has adapted to 5.25% funds, which is not restrictive, and so the economy is ready to grow. I believe that, the Fed believes that, the market savants that were convinced of a consumer implosion and recession last year -- don't.


Jeff said...

How do you feel about the ISM manufacturing index below 50 at 49.3? Historically this has been a pretty good leading indicator for the overall economy. It has been weak for the last few months. Any comments would be greatly appeciated thanks!!

Rational Experience said...

not sure that 49.3 is significantly different than 50. also, the service indicator was strong -- although future orders and employment plans were a bit week. in truth, only the market gets worked up over these month to month numbers. poole has said the fed looks at averages and trends and no single data point will change their view. looked at it that way, expect some manuf rebound in the spring (since there was a good sized inventory contraction in q4)

Jeff said...

Rational Experince,

Do you believe in looking at gold price when dedermining the right amount of liqudity in the economy? If so do you look for a target price or just when it stops rising. Some supply siders say a falling dollar and rising gold means the fed is supplying more dollars than demanded is this true? In the late 90's we saw gold falling and the dollar rising meaning a tight policywhen the economy needed liquid.

Anonymous said...

Are you still alive??

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Anonymous said...

The US is in recession and has been since August. This will be a hradlanding and clearly seen on November 23rd and felt worldwide by Memorial Day.

Danny L. McDaniel
Lafayetyte, Indiana