One blip a trend does not make.
Yes, we're all eager for any sign of hope on the economic front, and so the
slight upturn in our broad measure of the October data looks encouraging. But
it's probably just noise—a refreshing bit of noise from the larger bearish
trend, but noise just the same.
We're talking here of our propriety CS Economic Index, which is an
equal-weighted measure of 17 leading, coincident and lagging indicators that
track the broad trend in the U.S. economy. Leading indicators make up nearly
half of this benchmark's weight. As our chart below shows, October posted a
small rise in the index—the first after four straight monthly declines. (The
complete range of monthly economic data for any given month arrives at a lag,
and so October's numbers were only recently complete as of last Friday.)
Alas, it's not the start of a rebound. A big part of the blip in October can
be traced to lower interest rates, which register positively in our index.
Normally, lower interest rates dispense a bullish tonic for economic activity
now and in the future. Unfortunately, the times are anything but normal. Lower
interest rates, although they look encouraging on paper, have lost a fair degree
of their stimulative power in the real world at present.
The Federal Reserve, in short, is now pushing on a
string, to quote the popular phrase. With fears of deflation and continued
economic weakness in 2009, lower interest rates alone won't change sentiment, at
least not for the foreseeable future. That won't stop the central bank from
lowering rates to zero, but no one should expect something approaching free
loans to suddenly reverse all that's befallen sentiment in the U.S. in recent
months.
What, then, are we to make of the sharp rise in commercial and industrial
loans in October? This lagging indicator rose strongly, which helped boost our
CS Economic Index.
