Economic First Look: Focus on Fed's Latest Economic Forecasts

 | Dec 08, 2012 | 9:00 AM EST  | Comments
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Monday

  • No Major Economic Indicators

Tuesday

  • FOMC Meeting Begins
  • NFIB Small Business Optimism Index, 7:30 a.m.
  • International Trade, 8:30 a.m.

Wednesday

  • Import and Export Prices, 8:30 a.m.
  • EIA Petroleum Status Report, 10:30 a.m.
  • FOMC Meeting Announcement, 12:30 p.m.
  • FOMC Forecasts, 2 p.m.
  • Treasury Budget, 2 p.m.
  • Chairman Press Conference, 2:15 p.m.

Thursday

  • Jobless Claims, 8:30 a.m.
  • Producer Price Index, 8:30 a.m.
  • Retail Sales, 8:30 a.m.
  • Business Inventories, 10 a.m.

Friday

  • Consumer Price Index, 8:30 a.m.
  • Industrial Production, 9:15 a.m.

There are plenty of important economic reports this week that warrant attention. There's also the Fed meeting this week. I'll be particularly focused not just on what the Fed says in its official statement and in Fed Chairman Ben Bernanke's press conference following the meeting, but also the Fed's latest economic forecasts. And data on retail sales, inflation and industrial production are on tap as well.

First, the Fed meeting. Job creation, while positive, has been barely enough to keep pace with growth of the population -- but not by a sufficient amount to rehire the legions of unemployed workers, particularly those without work for a long time. The Fed is likely to be discouraged by a lack of progress on the fiscal cliff and likely will want to continue to support the economy in any way that it can.

Operation Twist expires at the end of the year. The Fed, in the statement following its last meeting, said (emphasis is my own), "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability." Reread that carefully.

Does this mean that the Fed might start a new bond-buying program following the end of Operation Twist, perhaps in January? Which are those "other tools" might it use? What does "improve substantially" mean? How many new jobs are substantial enough? Answers to these questions, and more, are what I will be seeking following the meeting. Still, I doubt we'll get any new policy measures announced at this meeting, and we may need to wait until the minutes of the meeting are released to really know what the Fed, especially its individual members, is contemplating.

Then there is the Retail Sales report, covering November. Recall that Thanksgiving, the putative start of the holiday shopping season, fell a week earlier than usual this year. That means that shopping began sooner, and Census Bureau's seasonal adjustments might not capture that timing issue accurately. Factor in there were rampant promotions and discounting, and the shopping season becomes harder to forecast, particularly because the retail sales report does not adjust for inflation and measures items in dollars, not units.

So if a shopper buys two toasters for 50% off each instead of the one toaster she bought last year at full price, she's bought twice as much this year, even though the dollar amount hasn't changed. The retail sales report won't compensate for that, and even the CPI report on Friday can't accurately capture all discounting that happens during this period.

As usual, I will strip out auto sales, preferring to look at those separately, and I will also exclude food purchased at grocery stores and gasoline, as these can be influenced by price changes. I will look at what people typically buy at a mall, and further eliminate building supplies. These can be influenced by weather and can be more related to construction activity than what we think of as shopping.

Here's what we know so far. During the four-day Thanksgiving weekend, spending in stores and online rose 13% from a year ago to $59.1 billion, according to the National Retail Federation. Last year, sales climbed 16% during the holiday weekend. For just web purchases, online sales advanced 14% from Nov. 1 through Dec. 2 from the same period last year, according to comScore. The gain was propelled by Cyber Monday, which was the biggest online shopping day on record.

Will this continue? Maybe, maybe not. Have shoppers adjusted their habits to do much of their buying during the Black Friday promotions instead of later in the holiday season? Will decreases in consumers' attitudes weigh down spending the longer the media focuses on the fiscal cliff with no resolution in sight?

In the latter regard, we learned Friday that the Thomson Reuters/University of Michigan Consumer Sentiment index dropped to 74.5 in December from 82.7 in November. It's now the weakest in four months. The "expectations" component of the survey matters more when predicting consumer spending than the headline does. And this component plunged to a one-year low of 64.6 from 77.6 in October.

But we see in the jobs report that incomes are up; aggregate weekly payrolls advanced by 0.3% on the month, which, while not stellar, can at least support some increased spending. Aside from income, household's net worth has been increasing as asset values, including home prices, improve and debts are reduced.

Net worth for households and non-profit groups increased $1.72 trillion, or by 2.7%, from the second quarter to the third, to reach $64.8 trillion, according to the Fed's flow of funds report. Asset values increased by $1.3 trillion, while liabilities fell by $400 billion.

As consumers feel wealthier, they may spend more, even if their wages aren't growing by leaps and bounds. This is reflected in the falling savings rate recently, which is still a positive number, meaning consumers are still saving, just less than they had been earlier. However, even if they are setting aside less for savings each month, the total dollar amount of their net worth can increase by a greater amount if asset values climb and liabilities are reduced.

As long as home values and share prices cooperate and aggregate incomes inch up a bit, consumers might continue to spend more -- if they feel confident enough to do so. And that latter variable is what we'll have to keep a close eye on in coming months. The further we go with no resolution on the fiscal cliff, the more worries consumers may have. Perhaps the good news might be that they may have already done much of their holiday shopping?

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