Economic Highlights for the Week Ending February 22, 2008

MONDAY, February 18th
PRESIDENTS DAY All Markets Closed
TUESDAY, February 19th
The NAHB housing market index increased to 20 in February from a record low reading of 19 in January. Home builders rated present, single-family home sales just slightly better, as ratings of sales six months from now, declined. Foot traffic through model homes increased, basically accounting for the overall gain in the index. While the index level is no where near a recovery level, at least it has moved off of its all time low.
With the risks to growth still biased toward weakening, financial markets are expecting another large cut from the Fed next month. Fed funds futures traders are fully pricing in a 50 basis point rate cut when the FOMC meets March 18. That would bring the target for the fed funds rate down to 2.50% from its current level of 3.00%.
WEDNESDAY, February 20th
The consumer price index rose 0.4% in January compared to expectations for a 0.3% gain. Price pressures were broad based, with significant increases in all categories. The CPI has gained 4.4% over the past year. The core CPI, which excludes food and energy costs, increased 0.3% on the month and 2.5% on the year. The above-trend rise in inflation is worrisome to the Fed and could complicate their rate decision in March.
New residential construction starts rebounded slightly in January from a very sharp decline in December, only because of a surge in the highly volatile multifamily category. Housing starts increased 0.8% in January to an annual pace of 1.01 million units, up slightly from a rate of 1.00 million units in December. Expect residential construction activity to remain soft through the first half of the year then hopefully start to respond to rate cuts in the pipeline in the second half of 2008.
The January 29-30 FOMC meeting minutes stressed risks to growth remained even after a series of aggressive rate cuts last month. They also confirmed that there was a great deal of uncertainty in the economic outlook. With regard to financial markets they acknowledged improvement but that strain remained and credit was more restrictive. Inflation data had been disappointing to the Committee, but they hoped that price pressures would ease under sluggish economic conditions. The Fed is likely to continue easing aggressively, 50 basis points at the next meeting, as they try to manage a complicated set of risks. Although economists do not consider a strong economic recovery likely, the FOMC, in that situation could reverse policy easing as aggressively as they implemented it.
THURSDAY, February 21st
The index of leading economic indicators fell 0.1% in January after declining by the same amount in December. This was the fourth consecutive monthly decline in the index which is consistent with very sluggish growth, possibly contracting growth in the next few quarters.
Jobless claims fell 9k to 349k for the week ending February 16. The four-week moving average, which smoothes out weekly fluctuations jumped 11k to 361k, confirming an elevated pace of layoffs and weakened labor market conditions.
Long term fixed mortgage rates shot higher this week as the one-year adjustable rates edged lower. Yields in the bond market have been moving in a similar fashion as traders sort through rate cut expectations, inflation fears, credit market turmoil and contracting economic growth. 30-year fixed rate mortgages averaged 6.04% this week compared to 5.72% last week according to Freddie Mac’s mortgage market survey. The average one-year ARM dropped below the 5.0% level to 4.98%.
FRIDAY, February 22nd
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12381.02 12348.21 +32.81 or +0.27%
NASDAQ 2303.35 2321.80 -18.45 or -0.79%
WEEK IN ADVANCE
It appears the Fed has to cope with the opposing forces of rising inflation pressures and downside risks to economic growth. For now, the latter takes precedence when deciding policy. The data will be watched closely in the meantime for any shifts in bias. Home sales and producer prices in the coming week will provide the latest economic & inflation readings.