|
February 16, 2007
Bias Changed: Fed Fears Slow Down
Although one month does not a trend make, yesterday’s surprisingly weak industrial production number may come to be regarded as one of the key statistical turning points for the US economy. As Northern Trust’s Asha Bangalore notes, changes in industrial production can be an important indicator to follow:
“Year-to-year changes in real GDP and factory output have a strong positive relationship (0.92),with the peak and troughs almost coinciding (see chart 2) Based on this historical relationship, the factory sector is sending an ominous signal that the economy has possibly reached a peak.”
Northern Trust
 |
What may also be worth remembering is that dramatic changes in Industrial Production can happen quickly: Starting in October 2000 US Industrial Production declined on a month-to-month basis for 15-straight months, and starting in February 2001 US IP declined on a year-over-year basis for 16-months in a row. Not only did no economist predict the severity of the manufacturing decline from 2000-2002, but the Fed was still talking up the threat of inflation a couple of months before this dramatic falloff began.
Bernanke said this week that inflation is expected to slow, and investor’s cheered. Some terribly weak economic statistics were also reported this week, and investor’s cheered.
“On Wall Street, investors viewed the weaker-than-expected industrial production as a further sign that the Federal Reserve is finished raising interest rates. The Dow Jones industrial average rose 23.15 points to 12,765.01, its second straight record close.” AP
So, after a few scary speeches to begin the year Bernanke and company are done fretting about inflation for the moment. Combine this development with some soft economic numbers, and what you have is a recipe for an economic peak gone by. Investors will not be cheering this scenario for long if the slow down starts become more widespread....
Remembering that years ago the Fed used to provide investors with a bias (of whether they might loosen or tightening in the future), consider the Fed’s ‘bias’ unofficially switched by Bernanke last week. Remember also that this is the first time in a long time since the Fed had to deal with a slow down.
The risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future. November 15, 2000. FOMC
The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. December 19, 2000. FOMC
|
