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June 2, 1989
Mortgage discounts are down this morning in response to employment data showing moderate economic growth. The Unemployment Rate fell .1% to 5.2%, and NonFarm Payroll grew only 101,000, about half the expected rise.
Other data this week continue to describe an economy growing at a reasonable pace, neither too fast to scare the Fed, nor too slow to threaten recession. Leading Economic Indicators rose .8%, Factory Orders climbed 2.7%, and Construction Spending grew .1%. Single Family Home Sales jumped 10.9% in April, but only in comparison to very weak periods before.
Inflation has moderated in all sectors of the economy: spring rains have knocked down grain prices, the rise in oil prices has flattened, the main index of commodity prices has shown a consistent decline, and gold and other precious metals have fallen to multiyear lows. Though the recent strength of the dollar won't help our trade deficit, in the short run a strong dollar reduces inflation: prices fall on imported products.
The Fed is getting some help from a surprise direction: the Congress. Of course the Congress didn't mean to be helpful not on purpose, you understand. The 1986 Tax Reform Act was supposed to be "revenue neutral," meaning neither raising or lowering taxes, just reorganizing the pain. But all of a sudden, Treasury tax receipts are running way ahead of forecast. The 1989 Federal deficit may be $40 billion lower than the $160 billion projected.
Surprising effects of the Tax Reform are a big part of the cause. This is the year that consumer interest is no longer a tax benefit. Ditto some business and medical expenses. Taxpayers are getting real estate tax bills from surprising sources: recapture of depreciation and losses on failed taxscam limited partnerships, for example. Very few shelters for new income reamin except the best, owning your own home.
If the Purchasing Managers Index (due out Monday, but frequently leaked early) shows a decline from last month's 53% level, the Fed will probably ease a little bit next week. The benefit to mortgages won't be huge, but we'll take it. The first sign will be Fed Funds moving from 9.75% to 9.50% or so, maybe on Tuesday.
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