Investors Question The Fed's Outlook

New Figures Point To Sharper Slump

Many investors aren't buying the Federal Reserve's forecast for a mild economic slowdown, worrying that a series of recently released figures might signal the onset of a sharper, more prolonged slump.

Stock prices fell yesterday and the dollar extended its recent decline after reports showing that construction spending fell in October at the steepest rate in five years, while the nation's factories produced less in November -- the first monthly drop in manufacturing activity in more than three years.

Those reports followed others last week showing the holiday shopping season got off to a tepid start and that new orders for big-ticket durable goods like airplanes and automobiles fell sharply in October.

The data prompted many analysts to challenge Fed Chairman Ben S. Bernanke's upbeat assessment Tuesday that most of the economy outside of the housing market "appears to be expanding at a solid rate," and his forecast for moderate economic growth through next year.

Investors also boosted their bets yesterday that the Fed, wary of the possibility of a recession, will cut interest rates early next year. They apparently gave little credence to Bernanke's warning that the Fed is more likely to raise rates to tamp down inflation than to lower borrowing costs anytime soon.

Financial markets "are paying more attention to the latest data, which largely contradict what Bernanke was saying," Paul Ashworth, senior economist at Capital Economics, wrote in an analysis for clients yesterday. "It is getting harder for the Fed to argue that the housing slump is not affecting the wider economy. It clearly is."

Some analysts were even harsher. Bernanke is "in denial" about the depth of the economy's slowdown, Ian Shepherdson, chief U.S. economist for High Frequency Economics, told clients on Thursday. Yesterday, he expressed hope the lousy data would push the Fed to consider cutting interest rates by March, if not before.

"The sooner the Fed is shaken out of its complacency about growth, the better," Shepherdson said. "The Fed hiked too far, and has already left it too late to avert a deeper slowdown than was needed."

Some optimists remained unshaken, sharing the Fed's view that consumer spending, which accounts for two-thirds of economic activity, will hold up fine because of low unemployment, rising wages and lower fuel prices.

"I think the markets are way overreacting," said Richard A. Yamarone, director of economic research at Argus Research Corp. "The economy is still moving, but maybe just not at a speed we've been accustomed to in recent years."

Yamarone pointed to the nation's low 4.4 percent unemployment rate in October, saying, "this economy is fully employed. Everybody who wants a job has a job, and that's what determines spending."

A Commerce Department report this week showed greater economic momentum in the summer than previously thought, with the nation's total output of goods and services rising at a moderate 2.2 percent annual rate from July through September.