As Americans embark on three weeks of partying tied to spiritual joy and the end of a super-successful year, a solitary figure sits in the corner. Behold! It is Alan Greenspan, contemplating an implosion of capital that is shaking the pillars of the global financial system. With Asian economies melting down, the question is whether the Federal Reserve Board chairman is thinking the unthinkable. Would he ask the Federal Open Market Committee, which meets Tuesday, to lower interest rates in an effort to reduce the pressure on the world’s down-and-out economic tigers? Chicago banker Kenneth Skopec sees no chance of such an action. “The Fed’s Christmas present to us is no rate increase–but a drop in rates simply isn’t in the cards” says Skopec, president of Mid City Financial Corp. He says this year’s drop in inflation at the wholesale level “represents the greatest decline since World War II.”
INFLATION
HONEYMOON OVER?
As Fed members gather Tuesday, November’s consumer price index will show a relatively benign advance of 0.2 percent, in line with year-over-year inflation that is running at only about a 2.2 percent rate, says economist Tim O’Neill. But inflation isn’t out of the picture forever, he says. “Pressures on wages, in the tightest labor market in a generation, show hourly pay is rising at more than a 4 percent annual rate,” says O’Neill, of Harris Bank and Bank of Montreal. “Inflation will surprise us on the upside during 1998.” O’Neill believes the Fed will be forced to raise interest rates, perhaps twice, between now and the end of March.
HOUSING STARTS
SLOWDOWN BUILDING
The home construction industry has been booming because of relatively low rates, but it could suffer a slight setback Tuesday. Economist Sung Won Sohn says November housing starts will show a decline of about 5 percent, to an annual rate of 1.45 million units from 1.53 million a month earlier. “The housing industry should slow further from now on,” says Sohn, of Norwest Corp. in Minneapolis, which is a major mortgage lender. He says that while the overall market remains strong, “there is a glut of new housing in a few cities, notably Las Vegas.”
WALL STREET
STOCK MARKET STUFFERS
The Dow Jones industrial average backpedaled 310.83 points, or 3.8 percent, last week, but it remains higher by more than 21 percent for this year. What happens next depends on whether investors are setting up for a Santa Claus rally or a year-end sell-off. The answer may well depend on the earnings outlook for 1998. Sherry Cooper, economist for brokerage Nesbitt Burns in New York, says earnings disappointments indicate that “stock market appreciation is likely to be single-digit next year, for the first time in four years.” Additionally, Cooper is telling clients, “the U.S. economy likely will slow significantly in coming quarters.”
