COMMERCE BANK ECONOMIC REVIEW - APRIL 2007

“If you don’t like the economic data, just wait a day, they will change.”

By Joel L. Naroff, Ph.D.

Forecasting the future is never an easy thing to do. I prefer forecasting the past, as my record is pretty good. But while those comments may sound funny, the reality is that good forecasters have to know when the past is not a good predictor of the future, if they are to get it right. Normally, that requires data that have some trend that makes sense. Lately, that has not been the case. Weak economic numbers have been followed by solid data, which often preceded unclear numbers. 

As usual, the focus of attention this past month was on housing and the data were as confusing as it gets. Housing starts surged. Although that might sound great, it followed an enormous decline in January – to the lowest level in almost a decade. Maybe things weren’t that great. As for sales, existing home sales rose, but new home demand fell to the lowest level since the end of the dot.com era. While there were inconsistencies in the data, some of the numbers were extraordinarily weak. So maybe there is not much more to fall. At least let’s hope so.

Housing does appear to be soft, but that sector is not the only part of the economy that counts. Ultimately, it’s all about the labor market. Payrolls increased in March by 180,000 workers, which is really quite strong. The gains were fairly widespread, although manufacturing remains a basket case. In addition, the unemployment rate edged back down to 4.4%. The lack of workers continues to drive up wages – they rose very strongly. 

Can things be really bad if firms are hiring and incomes keep rising? No, but don’t get too excited. The people who manage the nation’s supply chains told us that activity faded in March. The Institute for Supply Management’s manufacturing and non-manufacturing indices both fell. Ah, but industrial production jumped. Okay, that was true, but retail sales were weak. Get the picture? For every good piece of data there were weak or uncertain numbers.

With the state of the economy so confused, the Federal Reserve met to set interest rates. First, the members had to deal with a soft economy in the form of a sub par GDP growth rate. Then they had to look at the recent confusing economic data. And finally, they had to face the reality that inflation is just not going away. At least that is what the jump in consumer prices indicated.

So, what did the Fed do?  Instead of making believe that three consecutive quarters of sub-par growth was exactly what was forecasted, the FOMC members finally came to grips with the dual nature of the economy. That is, 2% to 2.5% growth is sluggish growth, not the moderate pace expected. But inflation pressures persist. Critically, the Fed now recognizes that it isn’t at all clear which of those two divergent concerns will dominate.  As a consequence, interest rates weren’t changed, but it was indicated that if the economy didn’t improve, rates might start coming down. That was market-moving positive news, although it still does not look as if we will see any lowering of rates before the summer.

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, America’s Most Convenient Bank, is a leading financial services retailer with more than 430 convenient stores in New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington, DC, Maryland, Virginia and Southeast Florida. Commerce Bancorp (NYSE: CBH) is headquartered in Cherry Hill, NJ and has more than $45 billion in assets. For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com.