As recently as three months ago, a hyped-up rate of economic growth, 5.6 percent, generated talk of an endless series of interest rate boosts by the Federal Reserve. But a welter of sobering news since then has fostered an opposite scenario: a rapidly deteriorating economy, squeezed by high oil prices, with no meaningful prospect of rates being lowered. Most economists fall somewhere in the middle, expressing faith that a so-called soft landing is possible, with activity slowing without a dizzying tumble into recession. That brings us to Friday’s report on third-quarter gross domestic product. Economist Steven Wood is looking for it to show growth slowing to a 3.7 percent annual rate, falling below 4 percent for the first time since the second quarter of 1999. Wood, of Banc of America Securities in San Francisco, said factors in the slowdown include “consumer spending that was healthy, but below its mid-1997 to early 2000 average.” Wood said a decline in housing activity and a slower rate of buildup for unsold goods also played a role in cooling growth.
CORPORATE PROFITS
SLOWING GROWTH
Analysts in recent days have complained of “see-through” third-quarter corporate profits reports: Namely, as soon as the results roll out, investors look past them, demanding to see what will happen later this year, or in 2001. Chicago investment manager Marshall Front says the profit slowdown created by Fed tightening and higher oil prices will mean a continuation of such concerns. “The decline in economic expansion means that growth in year-over-year profits will drop from a 20 percent rate to about 10 percent, hitting a trough during the upcoming winter,” said Front, of Front Barnett Associates. He said a reduction by the Fed in short-term interest rates early in 2001 “is a distinct possibility.” Accordingly, he is looking for “a reacceleration of economic growth and rising earnings momentum before midyear.”
DURABLE GOODS
MANUFACTURING STALLS
Nowhere is the slower economic heartbeat more evident than in the manufacturing sector, which has entered a period of no growth, except for technology. Expect Friday’s report of September orders for durable goods to be flat. That’s the prediction of Wood, who said, “factories have promptly adjusted their production to moderating consumer demand,” adding, “we also expect capital spending by business to decelerate.” Other key economic reports due: September existing home sales Wednesday and the third-quarter employment cost index Thursday.
EQUITIES
DOW FINDS ITS LOW
The recent perilous extremes in the stock market have left many investors breathless, wondering whether they have seen the bottom. Thanks to a modest rally late last week, analysts said the Dow Jones industrial average should be able to hold above its low point, around 9655. By the end of the week, the Dow stood about 570 points above that level. But skeptics and market technicians said the blue-chip average needs a gain of about 430 more points, to around 10,650, before investors can declare the coast is clear. In the meantime, Wall Street must steer clear of further shocks from high oil prices, the weak euro, or bellicose behavior in the Middle East.