Economic News Blog
Posted by: Steven Kline, Jr. 22. February 2013

Fed Funds Rate Pointing to Slow Down in Durable Goods

The Fed funds rate is the earliest leading indicator of the durable goods industry and capital equipment spending. Typically, changes in the the Fed funds rate lead changes in capital equipment spending by several years. Historically, I've used the Fed funds rate to indicate the direction of housing permits and consumer durable goods spending because both houses and durable goods are almost always bought with debt. Therefore, as rates go down, both houses and durable goods become relatively more affordable and consumers buy more of them. Of course, as more of these goods are bought manufacturing needs more equipment to make those goods.

However, since the Fed funds rate has been essentially zero since December 2008, the real Fed funds rate has become a better leading indicator. The real Fed funds rate is simply the Fed funds rate minus inflation. Even though nominal rates can't go below zero, the Federal Reserve can push real rates below zero if price inflation is greater than the interest rate.

The two charts below show the correlation between the year-over-year change in the real Fed funds rate and the annual rate of change in housing permits and consumer durable goods spending. Even though the real Fed funds rate is still negative, the real rate has been higher than it was one year ago for the last four months. This is clearly indicating that housing permits and consumer durable goods spending are both going to see decelerating rates of growth in 2013. While both housing permits and consumer durable goods spending are still in accelerating growth modes, the real Fed funds rate is indicating that accelerating growth should end any month now. Of course, the real rate isn't the only leading indicator (incomes and debt flow are both pointing towards accelerating growth in consumer durable goods spending). 

 

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