Current Reports - A weekly review of the implication of current and expected economic data.
Trendlines - Periodic perspective on the outlook for economic growth, inflation and interest rates.
Federal Reserve - These reports will analyze current and upcoming Federal Reserve policy.

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Current Reports

This Week / Next Week

More Data. Another Fed Announcement.
The Same Message

With many A-list data updates and another Fed meeting, it was an unusually busy week. But, the message was the same. Output is weak while inflation pressures are rising. And, Fed policy continues to straddle the growth-versus-inflation line: watching for less unfavorable short-term growth conditions so that monetary policy can shift to greater emphasis on increasing long-term inflation concerns.  

The government's 0.6% first estimate of Q1 2008 real GDP growth matched general expectations. Q1 2008 E1 was within the sluggish +1.0% to -1.0% run-rate that monthly and weekly data have been indicating. For Q1 real growth, two more estimates and four "final" editions lie ahead.  While history indicates that this number could be revised up or down by 1% point over the next five years, the eventual, final number for Q1 real GDP growth will most likely fit in the sluggish pattern that other data have described. Ironically, those commentators who use GDP growth as the recession criterion will now conclude that a recession did not begin in Q1 2008. Perhaps later revisions to this number will support a Q1 GDP recession conclusion. The 2001 official recession did not include two back-to-back negative growth real GDP quarters.

While the April labor headline data were less unfavorable than widely expected, most details of the report continued to support the conclusion that monthly Payroll Employment growth [down only -20k in April vs. down -80k in March] and the Unemployment Rate [5.0% in April versus 5.1% in March] will likely remain weak. Hiring breadth declined. The number of sectors with layoffs decreased. The Unemployment Rate usually pauses briefly during a sustained trend. The number of hours worked declined. The number of part-time workers increased sharply. And, probably most important, the government made a calculation methodology [inexplicable?] shift that very favorably influenced the Professional and Business Services sector. This sector's employment increased a sizable 39k in April after a large -44k decline in March.

Over many years, the NBER official recession-dating committee has used various criteria to identify recessions. While this list has changed from recession to recession, four measures have always been used. Three of these four criteria were updated this week. Graphs are attached. Together, they show a pattern similar to that of the early stage of the 2001 recession.

Growth

	Dec.	Jan.	Feb.	Mar.	Apr.
Real Personal Income [y]	1.8%	1.4%	1.3%	0.9%	N/A
Real Personal Spending [y]	2.2%	2.0%	1.6%	2.0%	N/A
Employment Growth	41k	-76k	-83k	-81k	-20k
Manufacturing Output [y]	2.0%	2.6%	1.2%	1.6%	N/A

[y] % year-over-year.

At its April 30 monetary policy meeting, the Fed cut the Fed Funds Target an expected 0.25% point to 2.00%. The announcement text generally repeated the language of the previous, March 18 meeting. The outlook for economic activity was described as "weak". Inflation was expected "to moderate in coming quarters". The Fed's preferred measure of current inflation, the Core PCE Deflator, increased at a 2.1% annual rate in March, the latest month, close to the upper end of the Fed's 1.0%-to-2.0% acceptable range. While inflation was expected to "moderate in coming quarters", concern about inflation expectations was repeated.

The Fed is walking the line, respecting its often-conflicting congressional mandates to promote acceptable growth while promoting acceptable inflation. As the Fed becomes more comfortable with the economic growth outlook and worldwide financial liquidity conditions, it will be more likely to pull back from today's highly stimulative monetary policy. An increase in the Fed Funds Target Rate is likely to occur sooner than history indicates. Even in a continuing sluggish economic growth outlook, market interest rates are likely to reflect this expected rising inflation concern.

Apr.		Prior	Med. Est.	Actual
29	Case-Shiller Home Price Index 20 Metro Y/Y	-10.7% Jan.	-12.0% Feb.	-12.7% Feb.	Highly visible housing series. Continuing major declines "needed" to reduce historically high inventories.
	Consumer Confidence – Conf. Board	64.5 Mar.	62.0  Apr.	62.3 Apr.	Since 1997: 145 – 61. Avg. 109. Downside risk: Highest total monthly payments, gasoline & food prices, political season.
30	Fed Monetary Policy Meeting	FF cut     -0.75% to 2.25%  Mar 18	FF cut    -0.25% to 2.00% Apr. 30	FF cut  -0.25% to 2.00% Apr. 30	Text very similar to Mar. 18 text: growth & inflation concerns.  Implying "clearly" that Fed will or will not cut again at upcoming, June 25 meeting.
	Annualized Real GDP Growth	0.6% Q4 2007 E3	0.5% Q1 2008 E1	0.6% Q1 2008 E1	Received much media attention but is merely E1 with 6 more editions to follow over the next 4+ years. Major, later changes likely. Regardless, growth became sluggish in autumn 2007. Official recession likely started Feb. 2008.
	Employment Cost Index	0.8% Q4 2007	0.8%  Q1 2008	0.7% Q1 2008	A non-event. Not a cost-push problem.
May 1	Personal Income	0.5% Feb.	0.4% Mar.	0.3% Mar.	Moderate but spending "crunch".
	Personal Spending	0.1% Feb.	0.2% Mar.	0.4% Mar.	Many pressures. Mar. looks like a blip.
	Core PCE Deflator -- M/M	0.1% Feb.	0.1% Mar.	0.2% Mar.	OK now but Fed says consumers' inflation expectations are too high.
	-- Y/Y	2.0% Feb.	2.0%  Mar.	2.1% Mar.	Fed says current inflation is OK but watching.
	ISM -- Mfg.	48.6 Mar.	48.0 Apr.	48.6 Apr.	Likely to continue below the historic 50 mfg. growth threshold. New orders are losing momentum.
	Light Vehicle Sales	15.1m Mar.	15.0 Apr.	NA Apr.	Honda April data delayed. Very low. Sales incentives aren't effective. High gasoline & food prices. Consumers postpone / cancel discretionary spending.
	Weekly Initial Jobless Claims	345k 4/19	365k 4/26	380k 4/26	Approaching the 400k 2001 recession threshold.
2	Payroll Employment Growth	-81k R Mar.	-75k Apr.	-20k  Apr.	Weak but has not collapsed to the -200k / -300k 2001 recession levels. Apr. improvement not sustainable.
	Unemployment Rate	5.1% Mar.	5.2% Apr.	5.0% Apr.	Remains moderate but usually lags the business cycle.
	Factory Orders	-0.9% R  -1.3% Feb.	0.0% Mar.	1.4% Mar.	Monthly wiggles. Sluggish underlying pace likely to continue.
5	ISM – Nonmfg.	49.6 Mar.	49.5 Apr.	Apr.	Continues below the 50 growth threshold.
7	Productivity	1.8% Q4 2007	1.0% Q1 2008	Q1 2008	Evolving short-term & long-term moderation.
9	Trade Deficit	$62.3b Feb.	$61.0b Mar.	Mar.	Very large. Will likely lead to weaker $.

* Median Estimate is derived from Bloomberg, other surveys and individual estimates.

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Trendlines

ASAP
Horton and Who- ville
Chairman Bernanke and Fed Policy

Horton and Chairman Bernanke
Dr. Seuss' "Horton Hears a Who!" was published first as a book in 1954. Released as an animated movie March 14, 2008, it grossed $45.1 million on the opening weekend, the largest opening day for the year so far, and $25.1 million on the second weekend. Attendance is on schedule to reach a blockbuster $100 million for the year. Audiences have been comprised of about 50% teens and adults-without-children. Critics have been extremely favorable. Jim Carry played the hero, Horton the Elephant. Other big names included Carol Burnett, the busybody Big Kangaroo, and Charles Osgood, the narrator.

Initially, the book's theme was interpreted as a political message. Some sources saw it as a plea against political isolationism. Others saw it as an anti-McCarthyism statement.  Some interpretations were even more controversial, to which the author, Theodor Seus Geisel, objected strongly. He insisted that Horton's only message was that we should respect the least people among us, that "A person's a person no matter how small."    

Dr. Seuss' elephant Horton acted quickly, heeding the ASAP acronym, " A ct S wiftly, A wesome P achyderm", to rescue Who -ville, Horton acted out of character with his large, elephant immobility. Fed Chairman Bernanke has acted quickly also, according to his guiding ASAP acronym, " A s S oon A s P ossible", on two fronts to prevent what the Fed labels as an "Adverse Feedback Loop": 1] the international financial liquidity problem and 2] the sluggish US economy. To most analysts, the speed of these actions has been inconsistent with Chairman Bernanke's gradualistic, academic background. [This does not suggest that Chairman Bernanke is like an elephant! It suggests only that as Horton acted contrary to his image, Chairman Bernanke has acted contrary to his image.]

Federal Reserve actions to improve general liquidity
This Fed has acted to provide financial liquidity as follows, among other steps:         

Launched a series of Discount Rate cuts to bring the rate from 6.25% to 2.50% currently. Emphasized that a broad range of collateral will be accepted for these loans.

Announced the creation of a Term Auction Facility, using a wide range of collateral , and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank.

Initiated a series of 28-day Term Repurchase Transactions in which primary dealers may use a broad range of collateral. 

Began a Term Securities Lending Program to offer US Treasury collateral to primary dealers in exchange for a broad range of other collateral.

Authorized a Primary Dealer Credit Facility "to improve the ability of primary dealers to provide financing to participants in securitization markets". Emphasized that a broad range of collateral will be accepted. Approved the financing arrangement announced by JPMorgan Chase and Bear Stearns.

In addition to these creative initiatives to provide additional liquidity for the financial system, the Fed continues to emphasize that it will seek every possible means to support "liquid, well-functioning markets". The Fed is expected to remain agile and aggressive in supporting US financial liquidity.

The recession debate
The economy is in a sluggish cyclical phase that many analysts and, seemingly, most media financial commentators have labeled as a recession. The most accurate label for today's economy depends significantly on which recession criteria are used. By the popular, GDP measure, a recession is defined as two back-to-back negative GDP quarters. The government's third estimate [there will be four more editions over the next four-plus years] of Q4 2007 Real GDP increased at a 0.6% annual rate. Q1 2008 real GDP is likely to be + / - 0.0%. Partly because of the tax stimulus, Q2 2008 will likely report somewhat positive growth. Following quarters should gain some momentum, but still at a significantly below-average pace.

In the most recent, March-to-November 2001 official recession, real GDP did not record two back-to-back quarterly declines, as usually measured by a seasonally adjusted rate or by a year-over-year comparison. Today, the odds of two consecutive quarterly real GDP declines seem significant but less than 50%:

These combined factors point toward real GDP growth that bounces around zero for quite a few quarters and then gains below-average momentum. It seems likely that if the 2008 economy includes an official recession, it [as during the 2001 official recession] may not experience two back-to-back real GDP quarterly declines.             

The National Bureau of Economic Research, the official umpire of the phases of the business cycle, defines an official recession as a "significant decline in economic activity spread across the economy, lasting more than a few months". There have been eight recessions since 1945, averaging ten months. Since 1983, there have been two recessions, each lasting eight months.

The NBER committee uses a changing variety of monthly data, with emphasis on these constants: real personal income, employment, industrial production, and real sales. GDP is not used because it is published on a quarterly basis and is subject to major revisions up to five years after the initial quarterly release. Critical monthly data published recently indicate a high probability that an official recession began a few months ago. NBER President Martin Feldstein, expressing his personal view in mid-March, said that the US economy is in a recession now. The announcement that an official recession has begun is usually published near the end of the recession. During national election years, the announcement is often made after the election.

The emerging inflation problem
The economy will likely continue on a sluggish path --- whatever the business cycle label. Meanwhile, a few hints of broad concern about down-the-road inflation have surfaced. Since the announcement of the aggressive fiscal policy to be implemented this spring --- on top of the already aggressive monetary policy --- this writer has been concerned about a likely inflation "payback" later. Other factors add to this concern: 1] the likely continuing weak US Dollar; 2] expected low productivity gains as incremental efficiencies likely fade from the mid-1990s technology boom; and 3] increasing inflation expectations, which can create inflation.

The Fed's criterion for current inflation, the Core PCE Deflator, increased at a 2.0% year-over-year annual rate in February 2008, the latest month. Over time, the Fed prefers that this measure run in the 1.0%-to-2.0% range. The Fed is willing to tolerate this slight discomfort with current inflation to provide support for economic growth. However, the Fed is newly concerned about rising general inflation expectations . For example, the University of Michigan Survey of Inflation Expectations 1 Year Ahead increased at a 4.5% annual rate in March, climbing steadily from 3.1% in October 2007.

The monetary policy outlook
In its most recent, March 18 monetary policy announcement, the Fed said that "Inflation has been elevated, and some indicators of inflation expectations have risen". Also, "uncertainty about the inflation outlook has increased". After several months' de-emphasis in the FOMC text, concern about inflation was re-emphasized in the March 18 policy conclusion. The committee's current focus is to "promote sustainable economic growth and price stability ". Today, the Fed's overriding current concern is to promote economic growth, implying very high odds that the Fed will cut the Fed Funds Target Rate April 30, at its next scheduled monetary policy meeting, or sooner.

The emergence of two dissenting votes at the April 18 FOMC meeting is an early hint at a policy transition to "hold". To continue this shift, the Fed will be looking for: 1] the beginning of the favorable fundamental impact of the Fed Funds cuts implemented last autumn, 2] continued increases in general inflation expectations, 3] stability and improvement in general financial liquidity, and / or 4] specific, major fiscal programs to improve the housing situation. Each of these four  developments could point toward a change in monetary policy: first, a halt in Fed Funds cuts, then an interval of no change in the Fed Funds rate, and then, likely sooner than history would indicate, an increase in the Fed Funds Rate.   

Horton saved Who-ville
"Horton Hears a Who!" centers around Horton's efforts to prevent Big Kangaroo and Young Kangaroo from boiling a dust speck in Beezle-Nut juice. Although all the tiny people of Who-ville live on this dust speck, the kangaroos are certain that Who-ville does not exist. However, Horton, and the mayor of Who -ville, and the tiny people of Who -ville save the day. With unusual effort, they convince Big Kangaroo and Young Kangaroo that Who -ville really exists. In the happy ending, the kangaroos, who previously wanted to destroy Who -ville, pledge to protect Who -ville:  
"From sun in the summer. From rain when it's fall-ish,
 I'm going to protect them. No matter how small-ish." 

The Federal Reserve 1] has taken unprecedented, creative steps to improve financial liquidity and 2] has implemented a highly stimulative monetary policy to promote economic growth. This aggressive monetary policy stimulation has been implemented to the degree that longer-term inflation risks have increased. So far, the implementation of changes in fiscal policy has been limited to essentially short-term tax stimulation. The problems of today's housing sector underlie many of our financial liquidity problems and overall growth problems. It is time for fiscal policy to refine and actually implement much-debated major programs to assist the housing sector.

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Federal Reserve

April 30, 2008: As Expected

Monetary Policy Announcements

	March 18, 2008	April 30, 2008	Change
Action	Reduce Fed Funds Target Rate -0.75% Point to 2.25%.	Reduce Fed Funds Target Rate -0.25% Point to 2.00% .	Smaller reduction
Policy Guideline	"Will act in a timely manner as needed to promote sustainable economic growth and price stability."	Same.
Growth	"Outlook for economic activity has weakened further."	Same.
Housing	"Deepening of the housing contraction."	Same.
Inflation	"Some indicators of inflation expectations have risen." "Expects inflation to moderate in coming quarters." "Uncertainty about the inflation outlook has increased."	Same.
Vote	Against:  Pres. Fisher and Pres. Plosser.	Same.

Today's FOMC announcement reaffirms the Fed's concern about the outlook for growth and inflation. Since the March 18 FOMC meeting, an increasingly vocal Fed minority has expressed concern about longer-term inflation prospects. But, this growing concern was supported today by only the same two dissents that were cast at the prior, March 18 meeting.  Recent Fedspeak about these dual concerns pointed toward only a 0.25% point cut today.

This writer continues to believe that the continuing weak, stagnant growth that likely lies ahead will prompt the Fed to vote for another 0.25% point Fed Funds Target Rate cut at the next scheduled, June 25, 2008 FOMC meeting. But, with the recent, officially endorsed inflation concern, the Fed is signaling that the end of the Fed Funds cuts is on the horizon, and that, possibly, a hike in the Fed Funds rate is "out there" sooner than history and most economic models might indicate.

 

RC Allsbrook, CFA
Chief Economist
Regions Financial Corp.

Information contained herein is based on data obtained from recognized sources believed to be reliable. This information has not been verified by us and we do not make any representations about accuracy, completeness or reliability. Any opinions expressed are solely those of the author and are subject to change without notice.