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The past couple weeks generated a rare string of good economic news. The sources of this positive economic momentum: a 7-percent increase in monthly retail sales, the resulting decline in business inventories and, perhaps best of all, a greater-than-expected drop in initial unemployment claims. This, coupled with the successful efforts on the battlefront and a sustained stock market rally from the September lows, had some feeling that perhaps recovery was closer than originally thought and the Federal Reserve's work might be done.
As quickly as the euphoria materialized, realistic expectations once again took hold. Another round of disappointing consumer confidence numbers, released Nov. 27, deflated much of the optimism. Initial unemployment claims also kicked back up for the week of Nov. 24.
There are still other potholes in the economic road ahead. A sustained rebound will also necessitate navigating around fourth-quarter earnings disappointments, declining production and capacity utilization, rising unemployment and a threat to the level of personal income.
Wednesday's Beige Book -- anecdotal evidence of economic conditions around the country, compiled eight times a year by the Federal Reserve Board -- painted an ugly picture. No surprises were contained as the Beige Book represents a compilation of conditions in the past several weeks. Useful to the Federal Reserve in setting monetary policy because it provides examples of economic weakness, it is also balanced with other leading indicators, those foretelling of future economic developments.
At the top of this list is the aforementioned consumer confidence measure. As the holiday shopping season unleashes hordes of shoppers on malls nationwide, the fear is that those shoppers will not be unleashing hordes of cash. Attractive discounts may help, but with 5.4 percent unemployed, and the other 94.6 percent concerned that they're next, collective restraint is the ominous spending forecast.
Durable-good orders, those expected to last three years or more, jumped by 12.8 percent in October. Much of this can be traced to zero-percent financing offers on many new cars as well as other price concessions made to push big-ticket items out the door.
While it is good news that consumers are responding to bargains, this increase does not necessarily represent a sustainable trend. Deep discounting does nothing to enhance corporate profitability, but it does deplete excess inventory, allowing producers to recall workers and expand production once a sustained rebound is under way.
A mix of good and bad economic news is sure to be seen in the coming weeks and months, with the good economic news validating the work the Fed has done thus far and hinting at eventual recovery. Any lousy economic news reinforces the notion that the Fed will remain active in cutting rates. But the further we venture down the economic road, more of the dark clouds should appear in the rear view mirror instead of looming up ahead.
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