Economic Watchdog, Nov. 20

On Tuesday, the Fed’s comments lower the odds for a Fed rate cut in December. The FOMC made another step toward transparency Tuesday when the committee provided their economic outlook for the next three years. These comments were part of the FOMC minutes from the October meeting. Housing starts were another focus today, along with energy prices. The weekly data on same-store sales was also released, as was the State Street Investor Confidence Index.

Housing starts rose 3.0 percent in October to a level of 1.229 million units on an annualized basis. This was above the decline expected to 1.16 million units. However, before you get too excited about the data, note that building permits fell 6.6 percent. This is important because building permits are a way of measuring strength in future housing starts. In the past year, starts are down 16.4 percent, but this is substantially better than the decline for 30.7 percent seen in September.

Fed leaders talked about the housing sector at the October FOMC meeting. The committee said it was a close call to cut rates at the meeting, but decided it was the best thing to do. Of course, Fed leaders remain concerned about inflation pressures, especially with the continued rise in energy prices. Oil prices soared on the session, gaining 3.85 percent to $98.29 a barrel. This is a new record high for the commodity and puts the crude closer to the important $100 a barrel level.

Investor confidence saw a sharp drop in November with the State Street index down 7.7 points to 74.3. This index measures confidence by looking at actual levels of risk in investment portfolios. The report stated that confidence diminished due to a lower outlook for consumer spending. Speaking of consumer spending, the weekly same store sales data showed a year on year gain of 2.2 percent as measured by the ICSC-UBS report. This is down 3-tenths from the prior week with the Redbook also showing a gain of 2.2 percent.

The main focus Tuesday came from the outlook provided by Fed leaders about the economy. Fed Chairman Bernanke stated last week that the Fed would become more transparent by releasing their outlook for the economy and inflation four times a year rather than just two. The release of this outlook this afternoon created a lot of volatility for the stock markets.

Fed leaders expect a slowdown in GDP growth in 2008 to a range of 1.8 – 2.5 percent. This is down sharply from the outlook provided last June for growth around 2.5 – 2.75 percent. The reason for the lowered forecast has to do with worse than expected problems in the housing sector and how the credit crunch has impacted consumer spending.

The committee sees the core PCE price index to fall slightly to 1.7 – 1.9 percent. Headline inflation is seen at 1.8 – 2.1 percent in 2008 after a nearly 3.0 percent gain in 2007. The concern is that record energy prices will spread pricing pressures into core items and that this could ultimately impact consumer spending. The Fed tries to find a balance between economic growth and moderate price increases. However, the comments made in the FOMC minutes report and other comments from Fed leaders of late seem to point to the committee sitting on their hands at the December meeting.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site