WASHINGTON (AFX) - Economic data to be released in the coming week is widely expected to show further evidence of a weakening of the economy, reflected in the possible steep decline in industrial production in December, economists said.
But most economists noted the slowdown may not be sharp enough to justify a 0.50 percentage point cut in key interest rates by the Federal Open Markets Committee at its meeting which starts on Jan 30.
However, they added that a sharp drop in the financial markets could induce the Fed to cut rates by more than 0.25 percentage point after all.
"The debate is not whether the Fed will cut rates or not -- we are all agreed that it will. The debate is by how much," said Ray Stone, managing director of Stone & McCarthy Research Associates.
"The economy may not be slowing fast enough for the Fed to justify a 0.50 point cut. But the FOMC will not only be looking at the economic data but also at what the financial markets are doing," he added.
Kathleen Stephenson, economist at CSFB, argued that the slowdown in retail sales released recently was not strong enough to call for another 0.50 percentage point cut at the end of the Month.
On a more cautious side, however, Mike Carey, economist at Credit Lyonnais, explained that the FOMC may decide in favour of another large rate cut to bolster economic growth in the first quarter of 2001.
With the final data of 2000 streaming in next week, economists are expecting both inventories and industrial production to have been affected by a decline in consumer confidence and disappointing sales in the last months of the year.
The faster-than-expected decline in sales, in particular in autos, has taken producers, who are currently scaling back production, by surprise, and is also causing inventories to accumulate.
Lehman Brothers economist Ethan Harris said prospects for a recovery in factory activity are bleak. The major auto producers have already announced plans to cut vehicle production in 2001 -- in some cases by as much as 25 pct. He added that, since auto assemblies account for roughly 5 pct of overall industrial production, these cutbacks should have a significant depressing effect on the industrial production index over the next few months.
Following are the consensus forecast for U.S. economic data to be released in the coming week:
NOV BUSINESS INVENTORIES, Tuesday (8:30 am): Wall Street economists expect business inventories to rise 0.5 pct in November, following a 0.6 pct rise in October.
Lehman Brothers' Ethan Harris attributed the sharp rise in business inventories mainly to a dramatic slackening in consumer spending, particularly in autos and durables.
"Since most producers were caught off-guard by the rapidity of the current slowdown, they did not start scaling back production until late into the fourth quarter," he argued.
But once the adjustment process is fully underway, he expects inventory accumulation to slow sharply.
DEC CPI, Wednesday (8:30 am): Analysts expect the CPI to rise 0.2 pct in December and for the core rate to rise 0.2 pct. In November, the CPI rose 0.2 pct, while the core rate rose 0.3 pct due to higher tobacco prices.
In December, a sharp rise in prices for household natural gas should have offset lower gasoline prices.
Goldman Sach's team of global economic research analysts reckons that even a modest increase in the core price index will push up the year-on-year change to a new peak.
However, economists added that some of the larger rise at the wholesale level may not have immediately been reflected at the retail level.
Elsew here, steep discounting of computers, autos and apparel have offset accelerating service prices all year, a trend that Lehman Brother's Harris expects to have persisted into December.
DEC INDUSTRIAL PRODUCTION, Wednesday (9:15 am): Economists expect industrial production to fall 0.5 pct in December after falling 0.2 pct in November.
Capacity utilisation is forecast to drop to 80.8 pct. In November, capacity utilisation stood at 81.6 pct
Industrial output is likely to have plunged in December due to a sharp decline in manufacturing output after firms extended holiday-related shutdowns to reduce inventories.
Cutbacks in the auto industry as well as construction activitiy hampered by adverse weather will also have affected output. The decline in industrial output is also reflected in the forecast drop in capacity utilisation.
DEC HOUSING STARTS, Thursday (8:30 am): Economists expect housing starts to fall around 4.0 pct to 1.50 mln units in December after rising 2.2 pct to 1.56 mln units in November. The Nov level was the highest since a 1.57 mln pace in June.
In a research note, Goldman Sachs economists said housing starts are apt to have been supressed in December by record-low temperatures and some late-month storms.
WEEKLY JOBLESS CLAIMS, Thursday (8:30 am): Jobless claims are expected to rise 12,000 to 357,000 in the week ended Jan 13 after falling 36,000 to 345,000 in the previous week.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said jobless data early in the year cannot be relied upon because "the seasonal adjustment process is more of an art than a science over the turn of the year." He said jobless claims could rise again as auto-makers and their suppliers lay people off temporarily.
NOV TRADE DEFICIT, Friday (8:30 am): The consensus forecast of Wall Street economists is for the trade deficit to narrow to 33.1 bln usd in November from 33.2 bln in October. In September, the trade deficit posted a record 33.7 bln usd.
Overall, economists expect the trade deficit to remain exceptionally large in November, amid modest rebounds for both exports and imports.