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Think Deeper Than Weak Report Headlines

Today's data do not signal any meaningful economic slowing, nor will they slow the Fed.

There were three major economic reports released at 10 a.m., and the reports were all weaker than expected. Despite the lethargy, the reports do not appear to signal any meaningful downshift in economic growth, nor do the data suggest that the Fed can take a breather from its rate hikes.

As I suggested in

my RealMoney blog in the preview for these reports, of the three, the Conference Board's consumer confidence index would probably be the least important. I still believe that despite the decline in the index to 101.7 in February from 106.8 in January (consensus 104.0). The index fell solely because of a decline in one of the two subcomponents of the confidence index, the index on consumer expectations.

For years I have suggested that the assessment of the present is a better predictor of spending than the index on consumer expectations. This makes sense in an economy in which the savings rate is as low as it is in the U.S.; any money earned by consumers will get spent. This is why I think it was important, then, that the index on the assessment of the present rose to 129.3 from 128.8 in February to its highest level since August 2001. It did so because of improved assessments of the job market. Indeed, 26.9% of respondents said that jobs were plentiful, up from 23.3% in January and the most since August 2001.

Isn't it better for the economy to have people working than for people to be out of a job yet confident in the future? This just makes sense when trying to forecast what's next for consumer spending. There are times, of course, when expectations could become fulfilled, but I do not believe it will be the case this time.

In looking at the expectations component more closely, note first that it fell sharply to 83.3 from 92.1 in January, reflecting ongoing anxieties, which arguably have been present since 2000. The current environment is obviously different than it was in 2000, and the postbubble, post-9/11 mentality is likely to be around for a while, and this will limit gains in the expectations component of the consumer confidence indices. This is how it has played out over the past two years in particular, a period of solid economic growth and low unemployment, yet consumer confidence has run substantially below the peak of the 1990s. (The overall confidence index was as high as 144.7 in 2000 and it averaged 135.3 during the period 1998-2000.)

Weaker Manufacturing Activity? Probably Not

The Chicago index fell to 54.9 from 58.5, its lowest level since August and in line with chatter ahead of the "release." There are no fundamental factors to support the decline, and some of the key components actually increased. Prices remained elevated, with the index at 71.6 vs. 75.3 in January. The market will likely defer to tomorrow's ISM index (consensus 55.5 vs. 54.8 in January) for data on a national scale.

Weakness in the Chicago index does not fit with the high level of order backlogs seen in recent months, the low level of business inventories, strong export growth and strong government spending, so it is probably an aberration. Perhaps the return to more seasonable weather had an impact (yes, this is the weather excuse, but it is probably only a small factor).

Weaker Housing? Probably

Existing-home sales ran at a 6.56 million annual pace, about 40,000 lower than expected and well below the peak of 7.35 million set last June. Although median prices were up 11.6% vs. a year ago, and the average price was up 8.3%, prices were unchanged in January. They are a few percentage points behind last year's peak and are trending downward. Inventories matched an eight-year high relative to sales, with the I/S ratio at 5.2 months for single-family homes.

With inventories high, prices likely will remain under downward pressure. Housing is likely to be weaker this year owing to a number of factors, including:

  • The 14-year low in housing affordability;

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  • Record price-to-rent ratios; record inventories;
  • Weaker price trends that will reduce the speculative fervor in the market;
  • Tighter lending standards;
  • Higher interest rates;
  • Rising assessed values that are raising the cost of insurance as well as real estate taxes, thus increasing the cost of home ownership.

Upcoming data are likely to confirm that the economy is growing solidly, making it likely that the Fed will raise rates at the next two FOMC meetings on March 28 and May 10.

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 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, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;

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