Peering into the future is usually fraught with hazards, so it is small wonder that many experts doubt the forecasting ability of the index of leading economic indicators. The arcane tool is supposed to gaze accurately six months ahead, yet economists complain that it consists of old data. Furthermore, it has painted a mixed picture, pointing mostly lower in recent months, helping to fan fears about a slowdown. Economist Tim O’Neill said he is looking for Monday’s report to show a further decline in December, on the order of 0.2 percent, “continuing the downtrend.” O’Neill said the pattern of economic weakness helped stir members of the Federal Reserve to act earlier this month, when they unexpectedly lowered short-term interest rates by a half-point. For now, O’Neill, of Chicago’s Harris Bank and its parent, Bank of Montreal, said the central bankers will look beyond the leading indicators to Thursday’s report on the fourth-quarter employment cost index. “If it shows an unusual spike, with a gain of well above 1 percent for the quarter, it would give the Fed pause,” he said. “Otherwise, they will lower rates by another half-point at their meeting later this month. Members of the Fed want to stimulate the economy as quickly as possible.”
FED POLICYMAKERS
HOW LOW CAN RATES GO?
With a mere eight days remaining before members of the central bank’s Federal Open Market Committee gather to discuss monetary policy, some analysts are growing impatient. They are clamoring for an additional move, ahead of the two-day meeting that begins Jan. 30. But Chicago investment manager William Hummer expects members of the Fed to wait until the meeting, and cut rates by a quarter-point, not the half-point some are seeking. “The central bankers will definitely reduce rates, but they want to be deliberate, and not appear overaggressive,” said Hummer, of Wayne Hummer & Co. “A quarter-point move would give the Fed some psychological ammunition, should they see a need to reduce rates another quarter-point before the following meeting,” scheduled for mid-March.
EXISTING HOME SALES
LONE ECONOMIC STALWART
Two other reports, existing home sales on Thursday and December orders for durable goods on Friday, will help to determine the Fed’s stance. Although home sales remain robust, concerns are growing that manufacturing has tumbled off a cliff. A report last week showed that factory production fell by 1.1 percent in December, the biggest one-month drop since March 1991, at the tail end of the last recession. About the only manufacturing sector that showed strength was utilities, which have been trying to churn out enough energy to keep Americans from shivering.
EQUITIES
JANUARY EFFECT NEARLY UP
The stock market is in a modest rally, and investors remain hopeful that the so-called January effect, which boosts whole categories of equities, will kick in over the next nine days. Investment manager Henry Van der Eb, based in Bannockburn, sees a likelihood the current rally could last for about a month, as stocks are carried higher by another Fed easing. Before spring, however, Van der Eb, of the Gabelli Mathers Fund, sees a further downside. “It will take a long time for the economy and corporate earnings to recover from the current slowdown,” he said. “The favorable effect of a reduction in rates will take longer than it did in the past, because consumers have too much debt.” He said the recovery should take nine to 18 months, creating doubts about whether investors are willing to look “across the valley” and wait for profits to return to recent levels.
