It's no wonder the US Federal Reserve cut its key interest rate half a per cent to 3%, taking the cuts of the past week and a bit to a huge 1.25%.
The Fed's current campaign of cuts has dropped the key Federal Funds Rate from 5.5% in early September to today's new level of 3%, but so far that's had no impact on the economy which went close to toppling into negative territory in the December quarter.
That's something to keep in mind as we assess the impact on shares and other asset classes.
The Dow perked up after the cut, but the S&P 500 and the Nasdaq remained in the red before turning positive and moving higher. Markets in Europe, Asia and Australia turned down yesterday.
But then, right as trading was ending at 8 am today, Australian time, the Dow and other indices turned down, leaving wall Street in the red and undermining an expected bounce for our market at the opening.
With the doubts over broker, tricom, still plaguing sentiment here, it is not going to be a nice day on our market again.
Especially as traders contemplate the latest news from the US economy.
Figures out before the rate cut reveal the economy hit stalling speed in the last quarter of 2007, with annual growth slumping to a rate of 0.6%, sharply down from the 4.9% reached in the September quarter.
This estimate was the first of three from the US Commerce Department, so there is scope for change, but the size of the fall took markets and economists by surprise.
After all, the market consensus was for 1.2% annual growth rate but the reality was much worse than that, leaving you wondering if the high priced economists were in touch with what was really going on in the US.
Driving the fall was a 23.9% drop in real residential fixed investment: mostly housing. That was the biggest drop since the same quarter of 1981.
Another worry was the surprise cut in stocks and inventories by companies in the quarter. That subtracted 1.25 percentage points from fourth quarter growth and economists said companies, especially car makers, could be cutting inventories because of declining consumer demand.
Certainly car companies indicated late last year they would be cutting production this month, and possibly February because of falling demand.
Consumer spending slowed in the quarter to an annual rate of 2% from 2.8% in the September quarter.
Commentators said that regardless what happens in the next revisions, the US economy is much weaker than thought, although early jobs figures from a private company, also out yesterday, are pointing to much stronger growth in jobs in January. We will find out about those figures early Saturday morning, our time.
On an annual basis, US growth slowed to 2.2% in 2007, compared with 2.9% in 2006. It only got above 2%, thanks to the abnormally strong third quarter.
Commentators pointed out there was another problem in the GDP numbers:
It's called the 'core personal consumption expenditure (PCE) deflator'. It's an important indicator of inflation and it rose 2.7% on an annual basis in the fourth quarter, up sharply from 2% in the third quarter and higher than the 2.5% that economists were expecting.
This could mean the US economy is heading for a nasty bout of stagflation.
The Fed however relegated inflation to a watching brief in the statement it released after the two day meeting in Washington. That statement echoed the one issued after the emergency rate cut on January 22.
Here's the latest statement:
"The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.
"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.
"The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.
"Today's policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."
The Fed said all the right things in this statement, as it did last week, leaving open the option of further cuts ("will act in a timely manner") if need be.
But there was one important difference. In the January 22 statement it said this: "Appreciable downside risks to growth remain", which was picked up by commentators who said it indicated a lot of concern at the Fed as to the prospects for the economy. In today's statement it dropped the word "Appreciable" and went with just "downside risks to growth remain".
