Economic Highlights for the Week Ending November 2, 2007

Monday, October 29th
Fed funds futures traders are fully pricing in a quarter point rate cut at the conclusion of the FOMC's two day meeting this week. With October's rate cut in the bag, markets are turning their attention to the next policy setting session in December. Odds are roughly 50/50 the Fed will cut again to 4.25% by year's end. The Fed's policy statement Wednesday should help to firm the interest rate outlook.
Tuesday, October 30th
Consumer confidence fell to 96.5% in October to its lowest level since October 2005. It seems surging oil prices, weak housing markets, tighter credit and sluggish job growth are weighing on consumer attitudes. Improvement in these issues should help to moderate declines and restore confidence going forward.
The S&P/Case-Shiller 10-metro monthly house price index fell by 5.0% in August, its fastest downward pace in more than 16 years. The 20-metro index dropped by 4.4%, showing that the decline is broad based and that lack of credit is affecting housing demand. Markets such as Tampa, Miami, San Diego, Las Vegas and Phoenix, markets that thrived in the boom days, are now the ones depreciating most rapidly.
Wednesday, October 31st
The MBA mortgage applications index rose 3.8% to 681.7% for the week ending October 26. Purchase applications fell 0.7% while refinance applications rose 9.2%. A drop in rates boosted refi activity while purchasing activity was flat as potential home buyers remain sidelined, waiting for a signal home prices have stabilized.
GDP grew at a 3.9% pace in Q3 lifted by strong consumer spending and net exports. The major weakness in Q3 economic growth was residential investment which took a full point off of growth. Economy-wide inflation eased to a rate of 0.8% from a 2.6% pace in Q2.
Construction spending increased 0.3% in September led by strong non-residential building and public projects. Residential construction spending fell 1.4% on the month reflecting the plunge in housing starts. Economists expect roughly a 10% decline in residential construction this year, then a modest gain in the beleaguered sector in 2008.
The FOMC trimmed the fed funds rate by 25 bps to 4.50% and the discount rate by the same amount to 5.0% following their policy setting meeting the last two days. The largely expected rate cut was tempered with language cautioning financial markets not presume that the FOMC is in the midst of a long, sustained rate-cutting cycle. The Fed indicated that growth and inflation risks are roughly balanced going forward. The statement also asserted that policy action to date should help shield the broader economy from adverse effects of the housing downturn and help with goals of moderate growth and price stability over the longer term.
Thursday, November 1st
The ISM manufacturing index slid to 50.9% in its fourth straight monthly decline. The index level indicates that the factory sector is still expanding, albeit very slowly. If weakness persists it could detract from Q4 GDP.
Personal income rose 0.4% in September as consumer spending gained 0.3%. Both were in line with expectations. A closely watched inflation gauge contained in this data series, the core PCE price deflator rose 0.2% on the month and was up 1.8% on the year, well within the Fed's comfort zone for inflation.
Mortgage rates declined to their lowest level in six months this week on continued concerns of weaker economic growth and further declines in the housing market. 30-year fixed rate mortgages averaged 6.26% this week compared to 6.33% last week according to Freddie Mac's mortgage market survey.
Friday, November 2nd
Payroll employment increased by 166,000 in October, double what economists were expecting. Service sector job creation was especially strong. The unemployment rate was unchanged at 4.7%. The report eases concerns of a housing induced slowdown in the broader economy and makes further rate cuts unlikely in the near term.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 13595.10 13806.70 -211.60 or -1.53%
NASDAQ 2810.48 2804.19 +6.30 or +0.22%
WEEK IN ADVANCE
The Fed's policy statement and subsequent data this week went a long way toward establishing solid economic performance and future policy decisions. Based on the economic calendar, oil prices and inflation will likely move to the forefront in the coming week as the Fed and financial markets continue to assess the risks to the economy.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco