Ignore consumer prices rising at 4% in the year to March and producer prices rising by more than 6% in the same time; food costs up 4.4% in the 12 months, transportation costs up 7%, energy up 17%. In March alone energy prices rose 1.9% and petrol prices rose 1.3%.
Those analysts who reckon inflation above the Fed's comfort zone of around 2% (it was 2.4% on a core basis in the year to March), means there's room to cut interest rates again at the end of the month, are missing the point of what's happening in the US economy.
Ordinary American consumers are being belted by rising energy and food costs, they are losing their homes in the tens of thousands, their jobs in increasing numbers and they can't see any upside in their lives, despite the rubbish being spoken on Wall Street. Consumer confidence is falling, retail sales are soft (clothing prices fell 1.3% in March alone as retailers cut prices to try and move unwanted goods). The outlook on the consumer side in the United States, which represents more than 70 percent of gross domestic product, is extremely poor.
The Fed's rate cuts are not working, and despite some tentative signs of housing 'stabilising at low levels in some parts of the US' it's far from convincing. In fact the March new home starts numbers destroyed that line from the Fed yesterday. The Reuters/University of Michigan preliminary April consumer sentiment index fell to 63.2, about 10% below economists' expectations and down almost 30% from last July. It was the lowest such reading since 1982 And with prices for food and energy continuing to surge, inflation expectations are rising to a level that would frighten our Reserve Bank, and no doubt is worrying the Fed.
American small business sentiment has also fallen sharply and according to the National Federation of Independent Businesses, its optimism index fell to the lowest level in the survey's 22 year history in March. That sort of information doesn't seem to be registering on Wall Street, especially among investors and analysts interested in so-called cyclical and defensive stocks: the ones you buy for the upturn and hold to ride out the downturn.
The slump in housing and the slowly rising tide of job losses (over 230,000 in the first quarter, which is not as steep as in 2001), the ever rising cost of petrol and food, has left the US consumer struggling to keep above water today. Take building a new home: it's a good sign of confidence: it's a far bigger step than buying an existing home; there's nothing but a dream until the reality takes shape.
The US Commerce Department produced figures yesterday showing that the number of new home starts fell by more than anyone had suspected: housing starts dropped 11.9% in March to an annual rate of 947,000 units, the lowest pace since March 1991 and its going to get worse because building permits fell 5.8% percent to the lowest since April 1991, when the economy was in recession.
"Consumer spending was characterized as softening across most of the country, with some Districts reporting year-over-year declines in retail and/or auto sales. In contrast, tourism was generally described as strong, with a number of Districts noting particular strength in foreign visitors.
"Reports on nonfinancial services varied by District: demand for transportation services was generally characterized as weak, while business and health services continued to expand; other service industries were said to be mixed.
"Trends in manufacturing also varied across Districts. Reports on real estate and construction were generally anemic for the residential sector; activity in the commercial sector has slowed.
"Financial institutions in many Districts indicated some deceleration in consumer loan demand, tightening in lending standards, and deterioration in asset quality. Most Districts reported improved conditions in the agricultural sector and robust activity in the energy industry.
"Labor markets were mostly described as weakening since the last report, though a few Districts reported ongoing shortages of skilled workers and some Districts noted wage pressures. Increases in input costs were widespread, accompanied by somewhat smaller rises in selling prices.
"Lending activity for new home mortgages, though generally characterized as sluggish, was reported to have stabilized in the New York, Cleveland, Chicago, and San Francisco Districts. Consumer loan demand, however, weakened in a number of Districts: New York, Atlanta, Chicago, and Kansas City."
And there's more. No wonder the Titanic sank: it hit an iceberg. The faltering US economy is that iceberg for Wall Street. The Fed has cut interest rates by three percentage points since mid-September, trying to stop, then slow the growing weakness in the economy: to no avail. The economy continues to tank, credit is hard to get and impossible for many: there are millions of people in the US who have fallen beyond the system.
They may have jobs during the day but they could be sleeping in cars, in trailer homes or in someone else's house or squatting in abandoned homes across California, Nevada, Florida, Michigan, Illinois and a host of other states.
It's impossible to believe, as so many analysts do that somehow this slowly sinking ship is going to resurface bigger and stronger in 2009, let alone the back half of 2008 as many analysts are still saying.
The Beige book is an important part of the research the Fed does before each meeting. The next meeting is April 29 and 30. The chances of a rate cut are still mixed, but the Fed remains apprehensive about the damage the cut back in lending is having in the US.
There is no support at the moment for any sort of activity, even though Wachovia, Washington Mutual (both $US7 billion) and JP Morgan ($US6 billion), Dell ($US1.5 billion and GE ($US8.5 billion) have raised money in the past week. In the case of the banks its new capital, in the case of Dell and GE its new working capital. All are paying substantially higher than they did a year ago.
Despite this activity, the Fed remains worried that the money is merely replenishing exhausted capital and reserves run down in the credit crunch. The 10 year bond rate is now over 3.79% after rising sharply this week on the poor inflation figures. The hard heads in the US bond markets know there's a problem with prices and that that will eventually force the Fed to take notice, or so they hope. The Federal Funds Rate is 2.25%, the CPI is 4%; and even the Fed's core measure is around 2.4%.
Cutting interest rates doesn't help people who are poor credit risks (or companies) get new money when times are tough: it helps the strong get stronger. There are 47 companies (with debts of $US34 billion) who are rated as being very weak by Moody's. Basket cases and banks don't fund basket cases when they are in the same league.
The credit crunch may be easing but no one on Wall Street has asked, what do we do next?
