The economy is drifting very close to the edge now and what would have taken a gale force wind a few months ago might well be accomplished with little more than a wisp now. You might remember that in last weeks’ Brief we posed the question as to whether the Fed had lowered rates enough to sustain economic expansion. We noted that future reductions might be constrained because of growing threats of inflation as well as a dramatically sinking dollar. But without them, we noted the odds were greater that the economy would falter. The past several weeks’ revelations of worsening banking and credit problems, combined with a host of economic releases showing deterioration have changed the tone of the Fed dramatically.

Since Greenspan made his comment in February of this year that theUScould be in recession by the end of this year investors and economists have largely taken the rosier view; that is until the last few of weeks. Oil flirting with $100, the dollar in freefall, anemic retail sales, housing in the depths, and a sub-prime mess, the extent of which is still unknown, have seemingly aligned forces against this economy. The majority view remains on the favorable side, but comments from the minority have grown louder and bolder.

This Friday marks the 20th anniversary of “Black Monday,” which sent the Dow Jones Industrial Average spiraling down 508 points or 23% in a day. The panic was sparked by investors realizing that Fed Chairman Paul Volker was wringing money out of the economy without apparent regard for its near-term health. His aim was to irradiate the prolonged and excessively high inflation of the time. The market drop was the second largest inUS history, second only to the first trading day after shutdown following the outbreak of WWI on 12/12/1914.

The week’s economic data was positive on balance. Given that the economy is largely consumer-driven investors are keenly interested in the health and intentions of the US consumer. The data on his health is largely positive. Wal-Mart and Costco were upbeat in their projections for the next quarter earlier this week. Today, the Commerce Department reported that retail sales increased 0.6% in September, more than forecast, following a 0.3% gain the prior month.

The sky may not be falling after all. Today the Labor Department reported that employers added 110,000 workers in September and they revised the August data to reflect that 89,000 jobs were added. The data correction is the larger news in that it reverses an earlier report that indicated the first loss in jobs four years. The employment scare raised fears that recession was more likely and probably played a significant role in the Fed’s decision to drop rates last month.

If the averages close today without significant change, the NASDAQ will have risen 4% and the Dow Jones Industrials 3.75%. Our models are on track to do well too with our most conservative up 3% and our All Growth model up 8.3%, before fees. They say the stock market climbs a wall of worry and there have been plenty of worries, but so far equity investors believe the economy will power on and that the Fed will do what it can to assure it will.

Will the one half percent drop in the Fed Funds rate be enough to turn the ill tide that was gathering strength in the minds of consumers and business leaders? Probably not, but it was certainly a giant step in the right direction. Ben Bernanke showed that he was his own thinker, and importantly, a forward thinker. While he can say that the decision was data driven, previous Fed chairs have waited longer and required considerably more information before making their decisions. In fact, it was popular to say that the Fed drove by looking in the rearview mirror.

Mr. Bernanke said he was waiting for timely data to inform the Fed about the strength of the economy. He got some today. The U.S.economy unexpectedly lost jobs in August for the first time in four years according to the Labor Department.USEmployers cut 4,000 workers from payrolls in August, compared with a revised gain of 68,000 in July that was smaller than previously reported. Economists were looking for payrolls to rise by 100,000 jobs. The unemployment rate held at 4.6% as almost 600,000 people left the workforce. 

Currently, the Dow Jones Industrial Index is up 6.4% from its August 16th intra-day low. The Nasdaq is up 7.25%. More to the point, credit markets are showing signs of improving. The four large banks in a show of support for the Fed’s reduction of the lending rate last week each borrowed $500 million at the Fed discount window. Though they paid the money back a short while later, it was an important symbolic show of support. It also indicates that banks have better options than borrowing at 5.75% from the discount window. But there is still not enough data to show whether non-bank mortgage lenders are gaining access to the recently risk-frozen credit markets.

Today’s news from the Fed provides good reason for why I don’t write the Brief in advance. We collect data all week and I assemble thoughts along the way, but economic winds can occasionally shift so fast that yesterday’s news literally becomes antiquated. A large portion of today’s topic would have been devoted to speculation of the Fed’s next action. Well, this morning they answered the question without ambiguity.