With short-term interest rates not far from a 10-year high, analysts say it is only a matter of time until the economy slows. The one-two punch of high interest rates and a government budget surplus are considered classic ways to dampen activity. As it stands, few economists believe members of the Federal Reserve will ratchet up short-term rates another notch when members of the Federal Open Market Committee gather Tuesday. Chicago economist Brian Wesbury says Fed members will take no action, though they will state they remain on watch for inflation. “The Fed already has overdone its tightening, with six rate hikes in the last 14 months,” said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm. “We already are seeing a slowdown, especially for housing, which is down 12 percent from this time last year. And, because of a lag effect, the full effects of economic slowing won’t be felt for perhaps another six months or more.” Wesbury said Fed Chairman Alan Greenspan is not the primary force behind the higher rates. Instead, he cited “hawks on the board, who fear potential inflation from unemployment that is holding at a 4 percent rate.”
MANUFACTURING
DURABLE GOODS DECLINE
A key factor that members of the Fed are watching is an industrial sector that has been stepping up production. But watch for Thursday’s report on July orders for durable goods to show a decline of perhaps 7 to 9 percent. That’s the prediction of economist Tim O’Neill, who says the orders numbers, which swing widely, are overdue for a correction after whopping gains of 7 and 10 percent in May and June, respectively. “The manufacturing sector has been revving up, as overseas economies continue to recover from the Asian crisis, but the Fed is not unduly concerned,” said O’Neill, of Chicago’s Harris Bank and its parent, Bank of Montreal. “Overall, manufacturing shows no major signs of slowing.”
INDICATORS
REVISED GDP SEEN HIGHER
Don’t be surprised if Friday’s revision of second-quarter gross domestic product shows a mild increase from the 5.2 percent annual rate of growth reported last month. Also, watch Friday’s numbers on July existing home sales for any signs of weakness. Last week’s report on July housing starts showed a steeper-than-expected 3.3 percent drop.
WALL STREET
BUMPY RIDE AHEAD
The stock market faces seasonal jitters, as investors contemplate the financial gales often seen in autumn. Chicago investment manager Marshall Front says Wall Street has been struggling since April 1999, just before the Fed began tightening monetary policy. “While we continue to believe the year is likely to end on a positive note, investors’ enthusiasm may be tempered in the weeks ahead,” Front, of Front Barnett Associates, said in a letter to clients. He said investors may encounter “unfounded fears of a `bumpy landing’ stemming from a premature pick-up in business activity this fall, and the possibility of overly aggressive Fed tightening.”
