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| Federal Reserve Chairman Ben Bernanke Jim Young/Reuters/file |
Fed acts, but a dip still looms
Its rate cuts haven't been aggressive enough to boost the economy, say some analysts.
from the December 13, 2007 edition
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"The Fed is late and they know it," says Gregory Miller, chief economist at SunTrust Banks in Atlanta.
On Tuesday, after the Fed's rate drop, the Dow Jones Industrial Average plunged 294.26 points, or 2.1 percent. The financial markets had been looking for a half a percentage point drop.
"Just when you thought that the Fed 'got it' following the dovish and credit-focused speeches by Messrs Bernanke, Kohn, and Mishkin two weeks ago, the tepid move today and mixed tone in the press statement suggest otherwise," wrote David Rosenberg, chief economist at Merrill Lynch & Co. to his clients.
Mr. Brown says the Fed's latest actions with the European central bankers is not a cure-all. "It won't solve the housing crisis or prevent the economy from slowing down," he says.
However, the Fed is also looking at an economy that in the third quarter showed no signs of strain. The Gross Domestic Product (GDP) rose by a rapid 4.9 percent, bolstered by exports.
"More often than not the economy accelerates just before it goes over the cliff and then the downturn is over before we even know we're in it," says Mr. Miller.
One major worry for economists is the reaction of CEOs to the economic clouds. The National Federation of Independent Business (NFIB) reported Tuesday a sharp drop in business confidence.
"The survey hit a 14-year low, which is what makes this significant," says Robert Brusca of FAO Economics in New York.
He says the drop in the NFIB index correlates with consumer spending. "This is where most of the jobs are – in small business – so when small business is doing well people have more money to spend."
The NFIB survey also found business becoming increasingly reluctant to spend money on capital projects. Such spending is critical for the economy to grow new jobs, says Miller. "That is the first part that generates demand for new jobs," he explains. "If business expects the economy to slow, they are less likely to spend money from their own pockets to expand."
There are already some economic statistics that show business is getting nervous. Inventory to sales ratios are now at a historic low. Mr. Rosenberg worries that business could pare back inventories even more as the economy slows. He estimates slower inventory accumulation will take 1.1 percent off the growth rate of the GDP in the current quarter. This would imply the current quarter is now negative, he says.
Zandi cautions that because the economy was so strong in the third quarter, it's easier for the economy to show negative growth in the current quarter. "It overstates the weakness," he warns.
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