Tuesday, May 31, 2005

Everyone knows

Interest rates are now the topic du jour around water coolers and in happy hours across America. Every group has at least one person who knows the answer. If there are two people who know the answer they are almost guaranteed to disagree, unless one of them is the other's boss. I am less certain about the answers, but nonetheless this week will proffer an idea or two.

.. the Leading Economic Indicators from ECRI are now down year-over-year. This has happened 10 times in the modern era, and we have had seven recessions and two serious slowdowns following those events.

1. There is now a strong downtrend in prices
2. The growth rate of US CPI seems to be capped at 3%
3. US CPI does not really accelerate with global economic activity
4. US CPI falls precipitously when economic activity decelerates

.."As Milton Friedman famously stated, and as History has proven time and again, a central bank can control only one thing at a time. It can control an exchange rate, short interest rates, or the growth rate of money supply... But not all at once. In the case of the Fed, the tool of action is usually the Fed funds rate.

.. is the ISM manufacturing number. I like to look at both the actual level of the number and the direction. If the number is above 50 it means there is growth in manufacturing and if it is under 50 manufacturing is slowing. Since hitting a high of 62.8 in January of 2004 (an excellent number) it has slowly and steadily dropped to 53.3 last April. The trend is not good. We will see the May data this Wednesday, and looking at other mid-month manufacturing figures, it looks like it will be lower again.