November 6, 2007—At its latest meeting, the FOMC cut the funds rate 25 basis points to 4.50%, its second consecutive rate reduction. The GDP grew 3.9% in the 3^rd quarter and has increased 2.6% on a year-over-year basis. Personal income rose 0.4% in September while consumption grew 0.3%. During the same period, growth in compensation costs decelerated to 0.8%, which is good news for inflation. Last, the ISM index decreased in October to 50.9, but remained in expansionary territory.

Federal Open Market Committee Meeting
The FOMC lowered the federal funds rate 25 basis points to 4.50%. The committee said that "economic growth was solid in the 3^rd quarter, and strains in financial markets have eased somewhat on balance." They expect slower economic growth in the near term due to the housing market and will continue to keep a close watch on the financial markets and monitor inflationary risks. They believe that as of now "the upside risks to inflation roughly balance the downside risks to growth" and do not have a tightening or loosening bias.

Gross Domestic Product
The ‘advance' estimate by the BEA indicates that the GDP grew 3.9% in the 3^rd quarter, up a bit from the 3.8% growth during the 2^nd quarter. GDP growth was driven by strong consumer spending as well as a large improvement in exports. Despite the growth, the overall economy is still soft, as the weak housing market continues to be a significant negative weight. Last, on a year-ago basis, the GDP has increased 2.6%, below its growth potential of 3.0%.

Personal Income
Personal income rose 0.4% in September, matching its increase from August. Concurrently, personal consumption grew 0.3%. On the inflation front, both the top-line PCE deflator and the core PCE deflator, which excludes food and energy prices, increased 0.2%. On a year-ago basis, the PCE deflator has increased 2.4% while the core PCE is up 1.8%, which is within the Fed's comfort level. Last, the saving rate improved in September, rising to 0.9%.

Employment Cost Index
Compensation costs for civilian workers increased 0.8% in the 3^rd quarter, down slightly from the 0.9% rise during the 2^nd quarter. Benefits costs rose 0.8%, a welcome deceleration from the 1.3% jump the previous quarter. Concurrently, wages and salaries grew 0.8% for the second consecutive quarter. The slowdown in wage and salary growth is good news for inflation and corporate profits.

ISM Index
For the fourth consecutive month, the ISM index inched down, decreasing 1.1 points in October to 50.9, its lowest reading since March. Manufacturing activity, however, is still in expansionary territory (above 50). New orders fell to 52.5 while production plunged to 49.6. After steadily falling over the last few months, "prices paid" jumped to 63.0 but is still well below its high of 73.0 in April.