Economic forecasting is an inexact science by nature, but it's about to get even more dicey in 2000.
Following the Federal Reserve Board's lead, economists are putting greater emphasis on the effects the roaring stock market will have on business operations, consumer spending, wage inflation, and employment this year.
So far, it has created a potent mix that's cleared some cloudy issues and muddled others. Last month, the Electronic Buyers' Index (EBI) reflected some of the market confusion and the increasingly difficult decisions OEMs must make in order to give accurate guidance to their suppliers.
The EBI dropped to 51.9 in December, from 54.4 in November, even as the EBI leading index, which usually precedes the main index by about three months, tacked on an extra 1.8 points to rise to 58.8, its highest level since January 1999.Since a reading above 50 indicates industry expansion, the higher EBI Leading Index figure "suggests that the EBI will continue to be in the low to mid 50s in early 2000," said Jim Haughey, EBN's staff economist.
The EBI's decline was largely due to sizable drops in new orders and employment. The new orders index fell to 52.8 in December, from 57.3 the previous month, when the Taiwanese earthquake caused a flurry of double ordering, Haughey said.
Meanwhile, the employment index, which had registered above 50 since last March, capped off 1999 at 48, an indication of lowered expectations for market and economic growth ahead.
The new-orders and employment segment dips would have cut into the EBI Leading Index's movement too, except that a 21% gain in stock prices in November more than offset the drop in new orders.
For the Fed and economists, it's been very difficult to gauge the exact impact the stock market has had on other variables, such as the labor market, wage pressures, GDP growth rate, and savings. As a result, the stock market, which has so far defied accurate prediction by some of the brightest minds on Wall Street, is now the biggest puzzle to the Fed and economists alike.
"The Fed will make no attempt to judge whether or not the [stock] market is a bubble, [let alone to try to deflate one], but the Fed will respond if the market is seen as contributing to pressure on economic resources [such as a tighter labor market]," said Scott Brown, a senior economist with Raymond James & Associates Inc., St. Petersburg, Fla.
The Fed began placing greater emphasis on the stock market in August after economists concluded that stock-market gains and stock options granted to employees were helping to stem inflationary pressures.
As of last Monday, the Nasdaq Composite Index, for instance, had risen 81% since the beginning of the year, while the EBN/Thomas Weisel Supply Chain Index had more than doubled during the same period.
The steep ascent of the stock market and concerns about the tight labor market will likely prompt another 0.25% interest rate hike during the Fed's meeting in February, economists said. Another 0.25% increase is also possible in May to tame inflation, said Raymond James & Associates' Scott.
That action, however, "could trigger a significant [stock market] correction, which would have a more dampening effect on growth than intended," Scott said.
Meanwhile, EBN's Haughey is predicting that OEMs will regain their positive attitude once Y2K concerns blow over.
"The December fall is curious since the outlook remains very good," Haughey said. "Perhaps some [people] are misreading the order drop to eliminate double orders as a real decline in order activity. The orders index is likely to rise to previous levels."