Economic News: Fast and Furious

The economic news came fast and furious today. The Gross Domestic Product grew by only .6% in the fourth quarter.

The economy nearly stalled in the fourth quarter with a growth rate of just 0.6 percent, capping its worst year since 2002.

Wednesday's Commerce Department report showed that the economy deteriorated considerably during the October-to-December quarter as worsening problems in the housing market and harder-to-get credit made individuals and businesses more cautious in their spending. Fears of a recession have grown, even as inflation remained elevated.

For all of 2007, the economy grew by just 2.2 percent, the weakest performance in five years, when the country was struggling to recover from the 2001 recession. The housing collapse was the biggest culprit; builders slashed spending on housing projects by 16.9 percent on an annualized basis, the most in 25 years.

Any veteran readers of my work know that I have been quoting the GDP as growing by 3.6% and that is because that was the number in the prior quarter. The generally accepted even number is 3%. Three percent growth is solid. Anything more is worrisome for inflation and anything less is worrisome for a recession. With only 2.2% growth that is of course concerning for impending recession.

This data combined with four straight months of weaker than expected employment numbers, and now there is conclusive evidence that the economy is softening. Let me say that again there is conclusive evidence that the economy is SOFTENING. The simple fact of the matter is that when employment slows down but the economy is still creating jobs that means the economy is softening, not in disaster. (keep in mind that the economy has created jobs every single month since July 2003). Also, when the GDP slows down but is still growing then again the economy is softening, not in disaster. There is not conclusive evidence that the economy is in disaster, or that we are about to head into a recession.

Frankly, the article I referenced isn't helping matters much frankly. When I read things like "deteriorating" and "fears of recession", I understand why the perception of the market is totally different than the reality of the numbers. GDP growth of .6% is concerning. There is no doubt about that, however it shouldn't warrant a word like deteriorate. Unfortunately, wording is vital in economic analysis. People respond not to what the GDP numbers are but rather what they are perceived to be. When folks read the economy is deteriorating and there are fears of recession, they perceive disaster and act as such. The numbers don't present an impending disaster, only the manner in which they are described do.

This is important because the fed cut its key interest rate by another half a point today.

Stocks closed in negative territory despite the Federal Reserve's decision to lower a key interest rate by 0.50% in an effort to light a spark under an economy that slowed down sharply at the end of 2007. A 175-point rally on the Dow was erased with just minutes left in the trading day.

The manner in which the fed has been cutting rates, over a point in the last week and over two points in the last three months, is more appropriate for an economic crisis. The more economic numbers I see the more I am convinced that we are in a softening period not necessarily in a period of disaster. Of course, we will be in a disaster if I am right.

Keep in mind we are at a minimum of three months from technically being in a recession. A recession is two straight quarters of negative growth in the GDP. Obviously we had small but positive growth in the GDP last quarter.

The more I watch the Fed and its response to the numbers that the economy actually produces the more I get the feeling that the inmates are running the asylum. The sort of economic data we have had the last three months warrants tempered rate cuts. That means the fed should be cutting rates by one quarter of one percent at each of their meetings. The Fed just cut the rate by 1.25% in one week. A softening economy needs mild stimulus, not a hurricane of stimulus.

A hurricane of stimilus is exactly what we have had. The fed funds rate is now down to 3% and I doubt we are done. Bernanke may be looking to cut this rate below two percent which in my opinion would be terribly irresponsible especially given the lessons of Greenspan's rate cut. This will be combined with the fiscal stimulus that the President and Congress are debating.

The more I watch Bernanke the more I get the feeling that the inmates are running the asylum. This stimulus appears to be in response to the so called cries of the market. That is a fancy term for traders in bond and equity pits complaining that he isn't doing enough to stimulate the economy. Any Fed chair that makes their decisions based on what a collection of blowhards in a trading pit want isn't fit for the job.

I know one thing for sure and that is he isn't responding to any economic data. The economic data would warrant a much more tempered rate cut. I predict that by this time next year he will be just as aggressively raising rates in order to avoid inflation. Once again, if a Fed chair cuts rates only to raise them just as quickly they have failed in their duty. Stay tuned...