The Economy's Identity Crisis
Will the real economy please stand up?
Is it the robust economy that created 378,000 jobs in December? Or is it the economy that cost 678,000 workers their jobs at major corporations? Could it be the economy of strong consumer spending, or the economy of sagging industrial strength?
Both economies are probably real. "We have a real dichotomy between the manufacturing and trade sectors versus the services and spending side," said Joe Abate, economist at Lehman Brothers.
In the coming week, investors will have fresh data on the two faces of the economy, plus news on a story that's dropped off the front-page: inflation.
The big numbers come on Thursday and Friday. First, the Commerce Department will release its retail sales numbers for December. The big retail chains and automakers have already reported some pretty stellar results from the holiday season.
"Retail sales will be very strong," said Mickey Levy, chief economist at NationsBanc Montgomery Securities. He said sales probably grew 0.6 in December. The boom in consumer spending will last as long as personal wealth is growing, Levy said.
Abate said retail spending probably rose 0.7 percent in December with a 0.4 percent gain in sales excluding autos.
"People are spending as if there's no tomorrow," Abate said. But that'll change as the slowdown in manufacturing spreads to other sectors.
The week's second big report comes Friday when the Federal Reserve will report on the health of the industrial economy. Economists are expecting a modest gain in output, given the increase in hours worked reported by the Labor Department. Levy is looking for a 0.5 percent gain in production, while Abate predicts a 0.4 percent increase.
Levy said production will now begin to recover after months of shocks to the system from weak foreign demand, an inventory overhang and a crippling autoworkers strike. "The worst of the decline has occurred," Levy said, as domestic demand makes up for weakness overseas.
Abate isn't so sure the factory sector has hit bottom. He sees growth slowing to 1 percent in the first three quarters of 1999. The Fed won't make a move to ease the slump until May, he said.
Levy said the Fed has already gone too far.
"The biggest risk on the domestic side is too much liquidity," Levy said. The economy is awash with cash, which is propping up both real spending and the record-setting performance in the stock market.
All that money hasn't translated into higher prices, yet. Levy said we could "see creeping price pressures later in the year." But Abate said firms just don't have the power to raise prices. "Consumers have become used to shopping around and getting the best price," Abate said.
The Labor Department will report on both the consumer and producer price indexes in the coming week. That big jump in cigarette prices is expected to show up in both numbers, meaning inestors will have to "weed out" tobacco prices from the inflation numbers, he joked.
Abate said he's looking for the "smokeless core" of both indexes to rise about 0.1 percent or 0.2 percent, in-line with recent increases in the inflation gauges. Levy said the PPI excluding tobacco likely fell 0.1 percent because of much-lower energy price.
Written By Rex Nutting, Washington bureau chief for CBS MarketWatch