As members of the Federal Reserve view recent weeks, they have noted a precipitous, even drastic, plunge in Americans’ willingness to buy. Consumers have shut off the afterburners on their credit cards while retailers have been running scared, some closing stores, others being forced into bankruptcy. Meanwhile, auto sales have crashed. A result was last week’s Fed shock wave, a half-point reduction in interest rates, part of the central bank’s formula for reviving Americans’ ardor for spending. The issue, however, is not whether buying enthusiasm can be rebuilt, but how quickly. The full extent of recent damage to spending will be seen Friday, with the government’s report on December retail sales. Chicago economist Brian Wesbury expects it to show a drop of 0.4 percent, largely because “car sales were horrendous. Auto sales [reported] by Detroit were down a stunning 10.8 percent.” Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm, said when car sales are excluded, last month’s sales were flat, partly because of the extreme weather. “Holiday buying saw no last-minute rush,” he said. “Reluctantly, we are starting to conclude that the country has entered a recession.” While the Fed is moving to correct what he deems its past policy errors, “a real rebound will take six to nine months,” he said.
4TH-QUARTER PROFITS
SINGLE-DIGIT GROWTH SEEN
The central bank’s action to shore up the economy came only days ahead of a severe testing period for Wall Street, as companies begin to report fourth-quarter profits. Chicago investment manager William Hummer says investors should gird for “further downside surprises.” Comparisons will be difficult, he said, “because last year at this time, expectations were high and companies delivered. Profits were boiling.” Hummer, of Wayne Hummer & Co., said a squeeze on margins is under way because “compensation and energy costs have risen, while sales growth has declined.” He said corporate bottom lines will grow in single digits for now, with a likelihood they will weaken further in the months ahead.
PRODUCER PRICE INDEX
GAINS APPEAR MODEST
As warnings about inflation appear less and less credible, Fed policymakers are confident that Friday’s December producer price index will confirm the wisdom of their action to loosen monetary policy. Analysts are expecting the PPI, which measures cost pressures at the wholesale level, to show a modest gain of perhaps 0.1 percent. The best news will be the price of oil, which has sagged despite a leap in the cost of natural gas for home heating.
EQUITIES
SECTOR LEADERS MISSING
The problem for the stock market has been a lack of leadership since the new year began. Last year’s winners, the utilities, have sunk deep into the red on fears that power producers in California are headed for bankruptcy. The Fed’s interest-rate cut gave a boost to transportation stocks, but investors are leery of placing further bets on airlines, railroads and truckers as long as fuel prices remain chancy. That leaves financials, drugs and consumer staples, but all three had a run-up late last year. Investors seem unwilling to mine much deeper in the fool’s gold of high technology, so they will be watching to see which, if any, of the stock groups can pull away from the pack.
