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Saturday, January 05, 2008

ECRI Says Fed Has Room To Cut Rates Despite Fears of Inflation

Friday's jobs report has many worried that the US economy is falling into or has already entered a recession. Rex Nuting of CBS Marketwatch reported:

Last update: 8:30 a.m. EST Jan. 4, 2008
WASHINGTON (MarketWatch) - The unemployment rate shot up to 5% in December as job growth stalled, a sign that the U.S. economic slump has spread to the labor market. U.S. seasonally adjusted nonfarm payrolls rose by 18,000 in December, the weakest job growth since August 2003, according to a survey of thousands of businesses. Job growth was revised up by a total of 10,000 in November and October. Economists were expecting payrolls to increase about 58,000 in December. Private-sector payrolls fell by 13,000, the biggest decline in more than four years. A separate survey of households showed employment plunging by 436,000, marking the biggest decline in five years. The number of unemployed adults rose by 474,000, pushing the unemployment rate up to 5.0% from 4.7%.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index (WLI) inched up to to 135.1 in the week of Dec. 28 from 135.0 in the prior week, revised from 135.2. The plunge in the growth rate of the WLI to -6.2% is the lowest reading since Nov. 16, 2001, when it hit negative 7.1% according to ECRI.

The positive effect of higher industrial commodity prices and lower jobless claims was almost fully offset by weaker housing activity, said Lakshman Achuthan, managing director at ECRI.

"WLI growth is now at its worst reading since the 2001 recession. However, the WLI's recent decline is not based on pervasive weakness among its components, suggesting that a recession could still be averted," Achuthan said.
ECRI's US Future Inflation Gauge (US-FIG), an index designed to anticipate cyclical turning points in inflatinon, also fell in its latest reading. This decline in the US-FIG means the Federal Reserve has plenty of room to cut 50 basis points or even more since inflation pressures are still in a cyclical decline.

Fri, Jan 4 2008, 14:40 GMT
ECRI US Inflation Gauge 117.1 In Dec Vs 119.8 In Nov

NEW YORK (Dow Jones)--An index designed to anticipate cyclical turning points in inflation fell close to a three-year low in December, to 117.1 from 119.8 in November, the Economic Cycle Research Institute said Friday.

The smoothed annualized growth rate of the index also dropped heavily, to -4.6% in December from -0.7% the previous month.

"With the [index] falling to a 31-month low, inflation pressures should not be a serious concern," ECRI Managing Director Lakshman Achuthan noted in a press release.

In this video from Fox Business Network, ECRI managing director, Lakshman Achuthan, spoke with Stuart Varney and Dagen McDowell following Friday's weak jobs report. Topics included the state of the business cycle and prospects for Fed interest rate cuts going forward.

My take on the data is we can still avoid an "official recession" as defined as two consecutive quarters of negative GDP growth if the Fed acts quickly to cut rates, probably 50 basis points or more by the next meeting, and continue to cut rates until either ECRI's WLI turns up and continues up for many weeks OR the US-FIG makes an about face and enters a period of cyclical inflation.

Come ask questions of ECRI Managing Director Lakshman Achuthan in our Investing for the long term facebook discussion forum called "ECRI Data (Economic Cycle Research Institute)"

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