Look Both Ways: Why the Jitters?

It was a Merry Christmas indeed for retailers, evidenced by last Thursday's Commerce Department release showing December retail sales up 1.2 percent from the previous month and 8.7 percent from December 2003. Inflationary pressures seem almost nonexistent; on Friday the Bureau of Labor Statistics announced that following a rise of 0.5 percent in November, the producer price index fell 0.7 percent last month — the steepest drop since April 2003. Friday's Federal Reserve announcement showed industrial production up 0.8 percent in December, compared with an increase of just 0.2 percent rise a month earlier, while companies managed to boost capacity utilization to 79.2 percent, up from November's 78.7 percent.

Yet despite these numbers and the broad consensus that 2005 will see moderate growth, the U.S. economy still has the jitters. The equity markets, evidenced by the erratic courses of the Dow Jones Industrial Average and Nasdaq Composite Index, speak for themselves. Consumer confidence and consumer spending aside, however, CEO confidence in the economy continues to slip. Last week the Conference Board, which polled 100 chief executives in a variety of industries, found that the confidence of this select group had fallen for the third consecutive quarter, to 61 from the third quarter's 63, although anything over 50 still reflects more positive than negative responses.

Like most of his prognosticating colleagues, Ira Kalish, global director of consumer business at Deloitte Research, predicts a year of moderate growth for 2005, but he also warns of "downside risks."

"Clearly we had a pretty good year and a pretty good Christmas, but there are danger signs ahead," Kalish told CFO.com. "The tremendous cashing out of home equity" that helped to compensate for "the collapse of the stock market in the early part of the decade" may burn itself. That's especially true given the prospects that — hammered by rising interest rates — refinancing activity continues to fall and "housing prices stabilize or fall within the next year."

But the real wild card may prove to be the fate of the dollar.

"We're at the knife's edge," says Kalish. "The dollar is certainly going to fall further, [but] if it falls precipitously, it could cause Greenspan to tighten more quickly, which might result in a recession." Bearing that possibility in mind, Kalish added that he would be looking closely at both the current account deficit figures and Treasury borrowings for evidence of variances that could spark a run on U.S. currency.

Looking ahead this week:

• Wednesday's announcement by the Bureau of Labor Statistics of the consumer price index release is expected to confirm the benign inflation trend showed by last week's PPI number. According to a consensus forecast reported by Briefing.com, the report is expected to show an increase in consumer prices of 0.1 percent for December rise, compared with a 0.2 percent climb the previous month.

• The real risk of downside surprise may come in the form of the Commerce Department's housing numbers, also due Wednesday. The consensus is that housing starts will have rebounded to 1.900 million as of December, up from November's disappointing 1.772 million. "Having fallen to their lowest level since May 2003," wrote Moody's economist Jessica Walker, "housing starts should rebound in December.

• Thursday's release by the Conference Board of leading economic indicators should show an increase for the second consecutive month, according to Walker. She predicts a rise of 0.1 percent for December, following a climb of 0.2 percent a month earlier.

Ed Zwirn's column "Look Both Ways" appears on Mondays. Contact him at EZwirn@aol.com.

On Wednesday, Ed Zwirn will moderate an economic panel discussion at the New York Stock Exchange. The program, sponsored by the New York chapter of Financial Executive International, will feature economist Ira Kalish (featured in this week's column), Credit Suisse First Boston's Kathleen Stephansen, and the New York Federal Reserve's Jason Bram.