FEDERAL RESERVE
In a tough spot
Members of the Federal Reserve are faced with a dilemma when they talk about the economy. Never wanting to adopt a tone of gloom, they keep saying that things are looking up, that a few soft spots don’t indicate a calamity and that the recovery will become apparent by the end of this year, or at least by early 2003.
All the same, the central bankers can’t close their eyes to a general absence of pre-holiday cheer. Among their concerns: the hapless state of such severely battered industries as the airlines, telecom providers and makers of heavy trucks.
Do those sectors of the economy justify lowering interest rates for a 12th time in less than two years?
That question will be on the agenda for the Fed’s policymaking Open Market Committee on Wednesday. Most analysts see the central bankers cutting interest rates by a quarter-point, to 1 1/2 percent. But not Chicago economist Brian Wesbury.
“It’s a close call, but at this point I believe members of the Fed will do nothing,” said Wesbury, of Griffin, Kubik, Stephens & Thompson.
For at least 10 months, he said, members of the Fed have been split about whether interest rates need to be reduced. Because rates already are at a 40-year low, Wesbury predicts most members of the central bank will vote for no action.
“After each meeting, they have described their monetary stance as being accommodative,” he said. “That is very important. Not all problems in the economy can be solved by the Federal Reserve. People shouldn’t expect instant gratification.”
Wesbury said that while some of the policymakers believe rates already are too low, creating a danger of eventual inflation, “no matter what happens, there will be dissenters.”
CAPITAL SPENDING
Up for technology
Fears that the economy would tumble into a so-called double dip recession have eased, but they haven’t vanished.
Chicago investment manager Marshall Front sees no chance of a further economic swoon, noting two factors point to further recovery.
First of all, consumers, while continuing to spend, are not as strapped as analysts have indicated, said Front, of Front Barnett Associates.
“Record refinancing activity is helping consumers to service their debts, which stand at only 12.7 percent of disposable income, well below levels of the mid-1980s,” he said.
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Secondly, there are clear signs that corporate capital spending is on the mend, Front said.
Surprisingly, he added, “real capital spending for technology equipment and software actually rose at a 9.7 percent rate in the first half of this year, making it the strongest sector of the economy.”
PURCHASING MANAGERS
Service sector off
Watch Tuesday for October’s non-manufacturing survey from the Institute for Supply Management, or purchasing managers, to inch lower from the 53.9 percent reading in September. Analysts believe a slowdown in consumer spending amid weakening confidence last month dampened activity in the nation’s service sector.
Also due out: September factory orders Monday, third-quarter labor productivity and costs Thursday and September consumer credit, also Thursday.
EQUITIES
Itching for a rally
Investors in the stock market are happy to see September and October, two months frequently devoted to hysterical behavior by nervous nellies, in the rear-view mirror. Now they are licking their chops, hoping for a year-end rally.
Bannockburn-based mutual fund manager Henry Van der Eb, however, is fearful that the optimists may be getting their hopes up too high.
“The market has a potential upside of 3 to 5 percent, but then it will be downhill once more,” said Van der Eb, of the Gabelli Mathers Fund.
He expects that in coming months “the market will take out the Oct. 10 bottom for the Dow Jones industrial average, around 7,197.”