January 29, 2008

Big Durables Gain Signals U.S. Health As Fed Mulls Policy

U.S. durable goods orders surged in December while other economic reports were weaker Tuesday, creating uncertainty about how much the Federal Reserve might cut interest rates on Wednesday.

New orders for big-ticket, long-lasting items rose 5.2%, the most since July, on strong demand for aircraft, machinery and communications gear, the Commerce Department said. Wall Street expected a 1.5% gain.

Nondefense capital goods orders ex aircraft, a proxy for business investment, jumped 4.4%, the most since March.

The report suggested the economy may not be so bad off after all.

"Recession fears have been exaggerated," said Richard DeKaser, chief economist at National City Corp.

It gave Fed policymakers something else to think about as they started their two-day meeting.

Futures traders now see a 74% chance of a large cut vs. 26% for a quarter-point ease.

The Fed already has slashed rates by 1.75 percentage points since September, including a surprise 75-basis-point cut last week. That followed a wave of bad economic news, including spiking unemployment, declining retail sales, faltering factories and a continued dive in home sales and prices.

But many analysts said talk of a downturn has been overblown.

"Between the durable goods and the consumer confidence, it doesn't point 15 the economy currently being in recession," said Joel Naroff, president of Naroff Economic Advisors.

January's Consumer Confidence Index fell 2.7 points to 87.9, the Conference Board said Tuesday. That's just above November's four-year low, slightly above forecasts.

Americans were a little more upbeat about current conditions, but gloomier about the future.

The share of respondents optimistic about future jobs conditions hit a 17-year low in January.

The housing recession also has weighed on sentiment. The latest data out Tuesday won't help.

Home prices in 20 U.S. cities fell 7.7% in November vs. a year ago, while prices in 10 major metro areas dived a record 8.4%, according to the widely respected S&P/Case-Shiller indexes. Miami and San Diego had the biggest declines.

There's no sign of a bottom, either. Monthly declines have accelerated for the past six months.

Also, foreclosure filings shot up 75% in 2007 to 2.2 million and the home ownership rate fell to a 51/2-year low, other data showed.

Yet many analysts urged the Fed not to go too far, too fast.

"The Fed has done a great deal already," DeKaser said. "Given the usual lags of cuts on the economy ... the Fed needs to be patient so as not to get too far ahead of itself."

Economists say it generally takes about 12 months or more for the effects of rate cuts to be felt.

There's also concern that last week's emergency cut, coming right after a global stock sell-off, gave the impression that the Fed was reacting more to financial markets than economic reality.

"The Fed is not being viewed as the leader but as a follower. They need to be in control," Naroff said.

Meanwhile, the U.S. House overwhelmingly OK'd a $146 billion economic stimulus package endorsed by President Bush. But the Senate is likely to make changes.

GDP data out Wednesday before the Fed's decision likely will show that the U.S. economy expanded at a 1.2% annual rate in the fourth quarter, down sharply from the robust 4.9% pace in the third.

The Fed also may have a general idea of what's in the January jobs report, due out Friday.

No comments: