Two reports on the housing slump and a key inflation gauge this week will give investors more indicators of the economy's health heading into the new year.
Wall Street hit a few snags last week: The tools in the Federal Reserve's arsenal look as if they may not be sufficient to battle the credit crisis, and inflation appears to be accelerating, which could prevent further rate cuts.
The Dow ended the week 2.10% lower, the Standard & Poor's 500 index finished down 2.44%, and the Nasdaq composite index ended down 2.60%.
The National Association of Home Builders on Monday releases its December housing index, which economists expect to hold at November's reading of 19, and the Commerce Department reports Tuesday on November housing starts and building permits, which economists predict will dip from October.
BlackRock's chief investment officer Bob Doll and BlackRock president Rob Kapito say in a research note that further rate cuts by the Fed are needed to bolster the economy.
"Our expectation has been, and remains, that the U.S. economy will avoid a recession, but the call is a close one, since we expect growth over the next few quarters to be well below the economy's long-term potential," they write.
The main drag on the economy has been, of course, the housing market, but the question remains how much farther it has to fall.
Citigroup chief economist Lewis Alexander says he believes the housing market will remain weak well into 2008, but it is more likely that the economy will keep growing than head into recession. Housing slumps of this magnitude in the past have led to recession, but he says this situation is different — unemployment remains relatively low, and consumer spending, while weakening, has not dropped too sharply.
In previous housing downturns, "the macro economy drove housing, not the other way around," Alexander said, noting that the current situation is more a housing bubble "that's correcting on its own."
Investment bank Goldman Sachs reports its fourth-quarter results Tuesday, Morgan Stanley reports Wednesday and Bear Stearns reports Thursday. Wall Street expects Goldman to have performed well this quarter, as it did in the third quarter, but expects big credit losses to hurt Morgan Stanley and Bear Stearns.
In other earnings this week, Best Buy, home builder Hovnanian Enterprises and Palm report Tuesday; General Mills reports Wednesday; Discover Financial Services, ConAgra Foods and Research in Motion report Thursday; and Circuit City Stores and Walgreen report Friday.
On Thursday, Commerce releases its final reading on third-quarter gross domestic product. Economists expect GDP to come in at a 4.9% annual rate, as estimated last month; however, they are less optimistic about growth in quarters to come.
Late in the week will be the Labor Department's report on personal income and spending in November, which will also include the Fed's preferred inflation measure: the core personal consumption expenditures deflator. Core PCE is expected to show year-over-year growth of 1.9% — within the Fed's comfort range of 1% to 2%.
Anything above that range could worry investors; last week, the consumer price index spiked and elevated jitters that the Fed might not be able to lower rates further because of accelerating inflation.