Retail Sales Boost Odds of a Fed Cut

December retail sales data fit with the weak batch of chain store sales data released last week, with non-auto retail sales falling 0.4% during the month, three-tenths of a percentage point more than expected and among the weakest showings of the past five years. In fact, December's was the worst showing for any December since at least 1991, and retail sales for the year were the worst year since 2002.

The weakness sharply boosts the likelihood that the U.S. economy entered recession in the fourth quarter, and it is almost indisputable now that the economy contracted in December. Weak consumer spending significantly increases the possibility of a turn in the U.S. production cycle, which will turn the virtuous cycle of increases in production, income, and spending that support economic expansions into a vicious one of self-feeding decreases.

With the economy having ended 2007 on a very weak note, the chances have increased for a contraction in GDP during the current quarter. This is because GDP is calculated as the average of one quarter vs. the average of another. In other words, when GDP ends a quarter below its average for that quarter, it begins the subsequent quarter below the prior quarter's average, a negative "base effect," as it is called.

For example, if GDP were 600 in October, 400 in November, and 200 in December, GDP would have averaged 400 during the quarter. Importantly, it would be beginning January at 200, which is below the prior quarter's average, raising the chances that GDP would be wind up in negative territory in the new quarter.

The chances of an inter-meeting interest rate cut have increased because of the implication of the data for the production cycle, because of the increased chance that GDP may have contracted in December, and because of the increased odds of a contraction in the current quarter.

ALL TONY CRESCENZI BLOG ENTRIES | POST A COMMENT | READ COMMENTS  

---

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.