ECONOMIC PREVIEW
Bernanke to make annual trek to Capitol Hill woodshed
PrintE-mailDisable live quotesRSSDigg itDel.icio.usBy Rex Nutting, MarketWatch
Last Update: 12:01 AM ET Mar 25, 2007
WASHINGTON (MarketWatch) -- It's getting to be an annual ritual for Ben Bernanke. Every spring, the Federal Reserve chairman appears at the congressional Joint Economic Committee to explain himself after totally confusing the financial markets.
Last year, Bernanke was forced to "revise and extend" some off-hand remarks he made to CNBC starlet Maria Bartiromo. This year, he'll come before the lawmakers to explain what the Federal Open Market Committee was trying to say in its latest post-meeting statement.
Bernanke's appearance on Wednesday at 9:30 a.m. will be the highlight of a very interesting week for economic news, including news about all the biggest issues of the day: inflation, housing, consumer confidence and capital spending. See Economic Calendar.
Like most of the data recently, another mixed bag is expected this coming week. While housing and capital spending will likely look much better in February than the disastrous January numbers, consumer confidence and inflation are heading in the wrong direction.
The data perfectly sum up the FOMC's judgment: the economy should be expected to grow at a modest pace, with housing continuing to drag on growth. But at the same time, core inflation will be somewhat more "elevated" than the Fed would like.
Bernanke will be called upon to make sense of the muddle of data, and to provide some clearer guidance about the future. Unfortunately, he's in the dark as much as the rest of us. Will the economy falter as the problems in the subprime mortgage market spread? Will inflation moderate as Fed officials expect? Will the Fed cut rates, or raise them?
Everyone has a forecast, but no one has a crystal ball.
The one thing Bernanke could clarify is the confusing message from the FOMC, which seemed to threaten higher rates with one hand while hinting strongly with the other hand that rates could be lowered. Bernanke has taken the ideal of a two-handed economist to an extreme. See our analysis in this Capitol Report.
As for the data, economists are looking for big rebounds in both new-home sales and durable goods orders, which had plunged in January. The expected gains in
February won't quite make up for January's declines, however.
Housing
Sales of new homes are expected to rise about 8% to a seasonally adjusted annual rate of 1.01 million in February after plunging 16.6% in January to a four-year low of 937,000. The figures will be released Monday at 10 a.m. Eastern.
These numbers are very volatile, especially in the winter months, when weather can make a big difference.
"Warmer temperatures in the West and drier conditions in the South should boost overall sales activity," wrote Dean Maki, an economist for Barclays Capital, in a weekly research note. What's more, fundamentals like low mortgage rates, "suggest further improvement."
Others think new-home sales will fall further over coming months. "We expect sales to slowly trend lower over the rest of the year," wrote Drew Matus, an economist for Lehman Bros., in the weekly outlook. "Tighter lending standards translate into fewer mortgage approvals."
Inventories of unsold homes should drop to a 13-month low of 530,000 from 536,000, according to Brian Jones, an economist for Citigroup Global Markets. Working off the inventories is the key to a recovery in the housing market.
On Tuesday, S&P will release its January home price indexes for 20 major cities. Prices were up 0.5% year-on-year for the 20-city index and flat for the 10-city index in December, the slowest price gain in 11 years. Prices were falling at an annual rate of 9% in December.
Capital spending Orders for durable goods are expected to rise 3.6% in February after sinking 8.7% in January. The figures will be reported on Wednesday at 8:30 a.m. The big story is aircraft orders, which fell 60% in January. Boeing got a big order for UPS, which should push up aircraft orders by 60%, said Matus.
The most important numbers will be for "core" orders and shipments -- that is, nonaircraft, nondefense capital equipment. Core orders dropped 6.4% in January, while core shipments fell 2.8%.
Core orders are expected to rise 1% in February, wrote David Greenlaw, economist for Morgan Stanley, in his weekly note. He expects a rebound in high-tech, which may have been "temporarily depressed" by the delays in shipping Microsoft's Vista operating system.
Capital spending remains a question mark for growth. Once upon a time, business spending was expected to make up for a weakened consumer, but capital spending fell at an annual rate of 3.1% in the fourth quarter. Citigroup's Jones expects core capital equipment shipments to rise 2% in February, which still leave the January-February total down 6.1% annualized from the fourth quarter's average.
Inflation
Core inflation accelerated in January and could do so again in February. The personal consumption price index excluding food and energy -- so-called core inflation -- rose 2.3% in the 12 months ending in January, "somewhat elevated," as the FOMC said, from the Fed's goal of 1% to 2%.
It could go higher in February. Economists are looking for a 0.3% gain in the core PCE price index, which would take the year-over-year increase to 2.4%.
The core PCE price index is taken from some of the same data used to compute the better-known consumer price index, which rose by 0.2% in February. "The underlying details suggest a stronger reading for the core PCE," said Matus of Lehman Bros.
The core PCE index gives more weight to medical prices than the CPI does, and less to housing. That's one reason the Fed prefers the core PCE over the CPI. But in February, medical care prices jumped 0.5% in the CPI. For physician services, the core PCE index uses data from the producer price index, noted Maki of Barclays.
The PPI for physicians jumped a record 2.9% in February, "posing upside risk" to Maki's 0.3% core PCE forecast.
Rex Nutting is Washington bureau chief of MarketWatch
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