The Federal Open Market Committee holds the fifth of its eight 2008 meetings Tuesday against an economic landscape looking a little gloomier than it did ahead of its June 24-25 sessions, when the Committee left the target Fed Funds rate unchanged at 2.00%.

Nonetheless, with inflation still looming as a threat, the policymakers are expected to leave the Fed Funds rate unchanged, perhaps disappointing some members who have argued for a boost in rates to deal with looming inflation.

Here’s a quick guide to what the FOMC members will be looking at when they convene, comparing the economic environment today with the situation before the June 24-25 meeting.

Overall Economy

GDP

-GDP improved sharply in the second quarter of 2008 from the first quarter, but the improvement was due to the stimulus payments, which ended in early July. Historical revisions showed GDP growth was negative in the fourth quarter of 2007, supporting arguments of a recession.

Labor Markets 

-Payroll jobs: Continued a slow rate of decline in July, the seventh consecutive monthly contraction.

-Unemployment Rate: Increased in July and is now up one full percentage point in the last year. Since the end of World War II, such a year-year increase has always been accompanied by a recession. 

-Unemployment insurance claims: Initial claims continue to trend up (even without the impact of the extension of benefits effective July 14). The four-week moving average (393,000) is approaching the weekly average during the last recession (405,000)

-Wages: According to the most recent data from the Bureau of Labor Statistics, while average hourly earnings rose 6 cents in July, hours worked fell to 33.6. As a result, average weekly earnings are up just 2.6% year-over-year, the weakest year-year gain since September 2005. Wages and consumer buying power (even without factoring inflation) continues to decline.

Consumer Activity

-Personal income: Boosted by stimulus payments, income rose sharply in May (reported after the June FOMC meeting) but growth fell dramatically in June.

-Personal consumption: Spending remained solid in June after a strong May increase, but spending concentration shifted to non-durable goods, suggesting limited discretionary spending.

-Savings: Personal savings increased in May and June, reflecting consumer use of rebates and concerns about the economy.

-Confidence: Surveys from both the University of Michigan and the Conference Board reflected a slight uptick in confidence in July, but both measures are still scraping bottom.

Housing 

-Home sales: New and existing home sales reports since the last FOMC meeting both reflected a drop in sales as prices rose. Stabilizing the housing market – which means price movements within expected ranges – remains key to economic recovery.
-Mortgage rates: Interest rates for both fixed and adjustable-rate loans inched up slightly since the last FOMC meeting. Actions by the FOMC do not directly affect mortgage rates but do have an impact on the prime rate which affects other consumer loan rates. Paradoxically, since long-term (i.e. mortgage) rates reflect inflation expectations, if the FOMC raises rates to control inflation it could push mortgage rates down.

Inflation

-CPI: Core inflation per the consumer price index rose slightly in June, to the highest level since March; all-item inflation spiked to the highest rate since May 1991.

-PCE: The inflation rates tracked through the personal income and spending report also increased in June: the core rate to the highest level since December, the all-item rate also to the highest level since May 1991.

Manufacturing

-Activity tracked through the monthly Institute for Supply Management index reflected little change through June. The Federal Reserve’s own capacity utilization rate and industrial production index continue to reflect similar slowing.

-Although individual Federal Reserve district presidents don’t necessarily vote their constituents, here is what the districts of voting members of the committee reported in the last Beige Book, issued two weeks ago:

-Second District (New York):Timothy Geithner: “The Second District's economy has shown further signs of softening in recent weeks…Contacts continue to note increasingly widespread escalation in both prices paid and prices received.”
-Third District (Philadelphia): Charles Plosser: “Business conditions in the Third District weakened somewhat from June to July. Reports of increases in input costs and output prices were somewhat more prevalent in July than they were in June.”
-Fourth District (Cleveland): Sandra Pianalto: “Economic activity in the Fourth District increased slightly since the beginning of June…Reports of rising input prices, especially for metals and petroleum-based products, were widespread.”
-Ninth District (Minneapolis): Gary Stern: “The Ninth District economy grew slightly since the last report…Wages increased moderately, while significant price increases were noted for fuel and energy; lumber prices were lower.”
-Eleventh District (Dallas): Richard Fisher: “Most contacts in the Eleventh District reported steady, moderate economic growth in June and early July…Rising prices for energy and transportation were reported as boosting costs for a wide range of industries and were said to be likely to lead to future increases in final product prices.”

As at almost every meeting, more attention is likely to be paid to that the FOMC says than what it does. Here’s what we might expect, paragraph by paragraph, in the statement issued after the meeting, using the June 25 statement as a base.

August 5 Statement vs. June 25 Statement (paragraph numbers added):

1. The Federal Open Market Committee decided today to keep its target for the Federal Funds rate at 2%.

2. Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
-In this “growth paragraph” the FOMC is likely to acknowledge continued weakness despite the jump in second quarter Gross Domestic Product and turn less optimistic consistent with Bernanke’s monetary policy testimony.

3. The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
-The inflation paragraph of the statement will probably note some easing of core inflation but ongoing struggles with the all-item rate. As much as the FOMC concentrates on the core rate – excluding food and energy – it also accepts the reality consumers feel the effect of higher prices on all items. The FOMC has some indicators its can cite – notably the dramatic slowdown in year-year growth in average weekly earnings and the drop in wage growth in the employment cost index – to suggest wages will not drive inflation.

4. The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
-The “policy/risks” paragraph – drawing from both growth and inflation -- should signal no immediate movement in rates. If the FOMC remains on hold in September [the next meeting is September 16] the Committee may not want to be seen as influencing the election and put off any action until it meets December 16, bypassing the October 28-29 meeting.

5. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
-We can probably expect Dallas’ Fisher to continue to dissent.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.