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September 23, 1988
Durable Goods Order data released this morning show a surprise jump of 6%, and the credit markets are reacting badly. Mortgage discounts will move up a half or so on the news, but I don't think much farther in the next few days.
The rest of the data for the week was ambiguous, which is typical of a moment when no one can be sure whether the Fed has tightened not enough or too much. Personal Income rose only .2%, August Housing Starts fell 3.3% (single family held alright, but the bottom fell out of multifamily), Housing Permits rose 1.9%, and the Consumer Price Index rose .4%, which showed no acceleration in the price trend. The last revision of the Second Quarter GNP put growth at 3.0%, down from 3.3% but still uncomfortably high for the Fed.
Though we may test mortgage rate highs (10.5s plus a couple) before the election, two pieces of news this week reinforce my belief that the economy is weaker than advertised.
The price of gold fell below $400 this week for the first time since February, 1987, and is down roughly $50 from its 1988 highs. This is about as powerful a deflationary signal as the markets are capable of giving. Other inflation measures have shown some gains this year, but not much in the face of droughtdriven farm prices.
The second item is related to the Wheel Of Fortune estimates of losses at S&Ls. It's not that the S&L regulators can't count to $75 billion twice in a row and get the same answer, nor just a political effort to wallpaper over the problem. It seems that the distress in income producing real estate from Carolina to California has been badly underestimated, and every time the regulators tote up the S&L losses, market deterioration adds another dozen billion dollars to the total. The Fed may be worried about an overheating economy, but falling commercial real estate prices should give them a price level worry of another kind. A lot of people think deflation is worse than inflation.
The next numbers which can really influence the Fed are the employment ones due on October 7. In the meantime we will bounce around within a discount point or two of where we are now.
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