New economic data out this morning shows strength in key sectors of the economy, including housing and manufacturing, as well as a rise in durable goods orders. New home sales were up 4.8% in December and home prices climbed 1.2% in November. Meanwhile, the bond market is seeing a sell-off as traders reassess whether a Fed cut is on the horizon. Stephen Stanley, chief economist at RBS Greenwich Capital, and Mark Vitner, senior economist at Wachovia Corp, were on “Morning Call” to talk about their differing outlooks on the economy.
Stanley is optimistic about where we're headed. He says this economy is progressing through a housing correction and the bond sell-off is unremarkable as it just takes away the Fed easing that had already been previously priced in.
But Vitner says there is no indication – even from the leading homebuilders – that the housing market has bottomed yet. He says the recent strength is due to the warmer-than-usual weather and some extreme discounting by homebuilders. He notes that the actual price of homes being sold has not been affected (that much). On the whole, economic growth will likely slide in the spring, he says, and then the talk of a rate cut will grow from a whisper to a shout.
The housing market isn’t entirely dependent on the weather, though, according to Stanley. He says homebuilders have large inventories that they must work off and it will take a while for them to catch up – but demand on the other side (individual buyers and realtors) is stabilizing, which seems to show that the worst is over for the housing market.
Both economists agree that the Fed will tighten in ’07 – Vitner sees a cut coming in June, while Stanley expects one as well, but not until the fourth quarter.
And as for the U.S. dollar – Vitner is somewhat bearish there as well. He predicts the dollar to continue to weaken against the euro but hold its ground against the yen and maybe even appreciate in value against commodity-based economies.